hi all, this is the situation: $320k LOC for personal expenses (ie non deductible) $200k LOC for investments of which $20k is a safety buffer. bad month, lots of debts etc will put me over the personal LOC limit. I need to 'borrow' from the $20k safety buffer in the investment LOC. can this be done without jeopordising my tax deductability on all other expenses in the investment LOC? thanks, tal
From someone not qualified to answer... yeah sure Regardless of the origin of finance and grouping with other finance, if it's used for income producing purposes, it's generally tax deductible. It will just be more of a pain to report on. Good luck
- T - - I used to go alphabetize the bookshelf and pantry contents when I was procrastinating over study - you post on InvestEd instead ;-) ??
Yeah my head was about to explode, so I sought solace in InvestEd. Can you imagine just over 12 straight hours spent calculating FRA settlements, bill futures, SPI hedges, forward FX, option greeks, blah blah blah. It paid off though, I was in the zone this morning at the exam. Until some guy coughed and for a split-second I wondered where I was. haha It's been a while since I've pulled a study all-nighter, I forgot how hazy it got. Back on topic now...
We'll I'm sure it wasn't all greek to you by the end *groan* Before all that "book learnin" drains out at the pub why not give us all a brain dump of the key points???? Cheers N.
Book learnin' is exactly right, I've never heard of anyone actually taking out an FRA. Then again, I've never worked in the industry either. Probably the most basic and relevant area considering the interest in equities here and the share market 'movement' would be hedging with SPI futures. I personally think it's too risky because the beta of a fund isn't reliable enough to peg it to a hedge (but that's my extremely novice opinion). Anyway, it goes something like: - if you have a portfolio, say $1M of BHP, $1M of CBA and $1M of OXR and say their corresponding betas are 1.3, 0.95 and 1.7, then the portfolio beta is approx 1.03 - you can hedge this portfolio using SPI futures contracts # of futures = (3m(1.03))/(25 x [current S&P/ASX200 value]) Say XJO is 4846 at the moment, then you need to sell about 26 SPI futures to hedge the portfolio investment. The portfolio goes down, futures go up. Would have been handy a week ago Same idea as put options, but cheaper and more flexible when considering a portfolio (especially with shares that aren't optioned). I realise that's probably old hat for many here, but Nigel asked and I thought it was cool when I first heard it. Options pricing is a lot more funky; still learning though.
Thanks T. Your example raises a really interesting question. Say you're sitting on a substantial unrealised cap gain in the market on particular shares. Given the current volatility perhaps you'd want to protect some of that growth. One way to do it would be to buy some put options. What other ways are there without selling?
"Say XJO is 4846 at the moment, then you need to sell about 26 SPI futures to hedge the portfolio investment. The portfolio goes down, futures go up ". Correct me if I am wrong.. If you are bearish on the market and you are willing to hedge your portfolio using SPI you should sell /go short (NOT buy as you said above) 26 above SPI contracts and buy it back at a lower level, and making a profit. Another word, if you suffer from the falling market you have an offsetting future position. Make sense ?.
Hey Tropo, are you trying to make me more hazy? hehe I did say sell, even in the quote in your post I think what you were referring to was me saying that the futures go up, when really I should have said the return offsets the portfolio loss. Nigel: I can't really think of any other way to hedge shares other than buying puts or hedging with SPI futures. You can additionally reduce risk in theory by writing options against your portfolio. I know that doesn't sound like reducing risk but you are increasing profit while keeping the same risk, which effectively changes the risk vs return. Also rather than exposing a large amount in a shares portfolio, you can synthetically create a portfolio through buying (long) SPI futures and investing the capital in fixed-interest investments. You can even synthetically create an individual share holding by writing a put and buying a call. That sounds odd, but think about it; unlimited upside, unlimited downside (to 0), just like a share holding. While I wouldn't actually do that, it puts holding a share by itself for the short term in perspective. Derivatives are actually very cool. There seems to be an unwarranted stigma attached to them. Used correctly, they are very flexible.
" I think what you were referring to was me saying that the futures go up, when really I should have said the return offsets the portfolio loss". Correct !!. Now you are back in business....
Hey Glebe Master of Finance at ANU. It's actually really enjoyable hey. Much more practical and real-world than I thought it would be. My girlfriend is doing it as well (but full-time) and is doing much more hardcore stuff. Wish I could give up work and be a uni bum! After a "hard" day of work, I see people just lying around on the grass, hanging out, attending the occasional class, not a care in the world. That's the life. -T-
