Question #62
Reading: Reading 30 Pricing and Valuation of Forward Commitments
PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf
Page: 26
Status: Unattempted
Correct Answer: B
Question
An equity portfolio manager who has a positive long-term outlook for equities, but expects equity prices to decline over the next three months, would most appropriately enter into:
Answer Choices:
A. a short straddle with an equity index as the underlying
B. an equity swap as the equity return receiver
C. an equity swap as the equity return payer
Explanation
By entering an equity swap as the equity return payer, the manager can protect the
portfolio value from a short-term decline in equity prices while keeping ownership of the
equities for the longer term. A short straddle costs the investor when the price of the
underlying moves up or down.
(Module 30.8, LOS 30.g)
Typesetting math: 100%