Illustrate how derivatives serve in asset allocation and rebalancing and in extracting market expectations from prices
The idea
Futures change a fund's mix quickly and cheaply without disturbing the managers of the physical assets: shifting from equities to bonds means selling equity futures and buying bond futures, and an overlay can restore target weights between scheduled rebalancing dates. Prices also reveal expectations. Policy-rate futures are priced at 100 minus the expected average rate, so the probability of a move is (implied rate − current rate) ÷ (rate after the move − current rate). With a current rate of 4.375% and a futures price of 95.55, implying 4.45%, a 25 basis point rise has a 30% implied probability. Inflation swaps reveal expected inflation. The trap is assuming one move size and ignoring risk premia.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
Take the free diagnostic →More in Swaps, Forwards, and Futures Strategies
- Show how interest rate futures, forwards and swaps can reshape the risk and return of a portfolio
- Illustrate how currency forwards, futures and swaps alter the risk and return of a portfolio
- Illustrate how equity futures, forwards and swaps can change a portfolio's return and risk profile
- Show how volatility derivatives, including variance swaps, are used in practice
- Show how derivatives can set a portfolio's equity and interest rate exposures at chosen targets