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You have been assigned a new fund to lead. The fund's allocation is as follows: 10% forex (US dollar) 30% bonds 30% equity 20% alternate

You have been assigned a new fund to lead. The fund's allocation is as follows: 10% forex (US dollar) 30% bonds 30% equity 20% alternate Investments (Real estate and commodities) 10% Private equity The recent economic forecast suggest inflation may be higher than target following strong recovery post lockdown. The Bank of England is expected increase interest rates in the next policy announcement expected in 2 weeks. 

Fund value is £200m. 

• Beta of stocks in the fund is 1.2 

• Modified duration of the futures is 6.2 

• Price of Treasury futures is 30,500 

• Price of equity index futures is 150,000 

• Beta of equity index futures is 1 

• Duration of treasury futures is 5.0 

• Beta of REITs in the fund is 1.2 


I) Calculate the number of bond futures contract and equity index futures that should be bought or sold to reduce expose to interest rates by 50 percent and increase equity exposure by 20 percent.  II) Calculate the number of bond and equity future the fund should buy or sell to increase allocation to alternate investment by 5% by reducing allocation to bonds by 5%. REIT index future beta is 1 and price of REIT index future is £99,000.

 You are also thinking of synthetically increasing fund exposure to alternate investments. 

Discuss is this a good time to implement this? 

Outline the details of the hedge to manage the currency risk of the portfolio using the forward contract. Should you buy or sell a forward contract on the currency exposure and what should the contract size. Why would you enter into a forward contract that may result into a loss as you know it in advance?  


Discuss three  advantages and disadvantage of future contracts against swaps.

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ANSWER I To reduce exposure to interest rates by 50 percent the fund should sell half of its bond futures contract Assuming the current value of bond futures contract is 100000 the number of contracts ... blur-text-image

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