Practical Applications from the Experts - March 2009

categories: Product Documentation, general

Equity Return Booster - Ultra Short/Long Funds

In most equity related position types you can now see a new field: Equity Return Booster.

It behaves similar to the beta field, but there are differences. Some ETFs may track the S&P 500 and move down 3 points if the S&P goes up by one. This kind of Ultra Short Fund is commonly entered using the equity position type with S&P 500 as the equity name and selecting a beta of minus 3. In the attached report we have a position only with the S&P 500 as underlying followed by two positions with Beta values of 2 and -3. Finally the last two rows shows equity positions against the S&P with the Equity Return Booster set to 2 or -3. The results show that Beta has no effect on the holding when a simple stress (Equities +10%) is applied. On the other hand the Equity Booster does what it is supposed to do and boosts the 10% shift by a factor of 2 or -3.

In the case of predictive stress tests the Beta is being used, but the results are not linear. For a beta of 2 you may expect the stressed value to be twice as much, but since the Beta is used as a factor with the log return the results are not β times 10% but instead Exp{β*Ln(1+10%)} = (1+10%)^β or 21% for β=2.

The Equity Booster is used in conjunction with percentage returns. As expected the stress test results are multiples of the Booster for a simple stress test and in both cases the predictive results are linear multiples of the Booster too.

As a result of this the Delta Equivalents for a position with Booster set to B will be B times larger than the original position and hence the Parametric VaR will also be B times larger.

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