Show how derivatives overlays can implement tactical allocation shifts and portfolio rebalancing
The idea
An overlay changes exposure with futures or swaps while the physical holdings stay put. To shift tactically from bonds to equities, the manager buys equity index futures and sells bond futures of matching value. Equity contracts needed = ((target beta − current beta) ÷ futures beta) × (portfolio value ÷ contract value); bond contracts = the basis point value gap ÷ BPV per futures contract. For example, moving 75 million from bonds of duration 6 to equities at beta 1 takes 75,000,000 ÷ 250,000 = 300 equity contracts of 250,000 notional, and removing the bonds' BPV of 45,000 takes 45,000 ÷ 80 ≈ 563 bond futures with a BPV of 80 each. For rebalancing, overlays restore policy weights quickly when drift breaches a corridor. The trap is forgetting the cash and collateral the overlay needs for margin and the roll.
In the app: 1 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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