This is a case study in corporate finance where an investment management firm BEA Associates evaluates the feasibility of various financial derivatives for an Index Account of Japanese Insurance Firm.

1. BEA Associates: Enhanced Equity Index Funds
Presented By :
CHITRANSHU SHUKLA
23-01-2017
Disclaimer:-> Only for Educational Purpose
Case Study BEA Associates-Corporate Finance
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2. BEA Associates
BEA Associates is a New York based asset management firm founded as Basic
Economic Appraisals in 1934 it offers its investment services to corporations,
charitable institutions, and High Net worth Individuals(HNI). Firm was acquired by
Credit Suisse.
OBJECTIVE OF THE CASE
Discuss the use of derivatives in the implementation of investment decisions and
relative costs of investing in various instruments.
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3. Que1) How does BEA’s enhanced equity index fund approach
work?
Info-:> An index fund is a type of mutual fund with a portfolio constructed to
match or track the components of a Market Index which in this case is S&P .
Where a mutual fund is an investment vehicle made up from pools of fund
collected from different investors for the purpose of investing in a diversified
portfolio which might comprise of stocks, bonds and many more.
Ans1) In case of index fund, your cash goes to purchase the securities as listed in
the index, and return is earned in form of dividends plus capital gains or losses on
the stocks whereas you forego the interest on the cash.
In synthetic approach one does not pay anything for future stocks whereas you
still earn gains or losses on Index. You forego the dividends on stocks but still earn
interest on cash.
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4. Corporations listed in S&P as of 23-01-2017
23-01-2017
Data Source:-> money.cnn.com
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5. Futures:->
Future contract is type of a financial instrument or derivative in which two parties
agree to transact a set of financial instruments for future delivery at a particular
price.
Pertaining to the case if the previously discussed two strategies should produce
identical results given the futures transacted are correctly priced, but the
advantage associated with the transaction in future is that
1) It is cheaper way of investing as it saves in transaction costs.
2) Offers flexibility in managing taxes, and helps in taking advantages from tax
exemptions.
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6. Que2) Evaluate the attractiveness of the strategy involving
S&P500 futures?
Ans2) In the approach of directly buying shares investor receives at the end of
holding period the ending S&P 500 index value S&Pend
plus any dividends paid
during this period.
In synthetic approach investor buys S&P index futures and invests the principal in
cash equivalents. The payoff on each futures contract is given by the difference
between the beginning and ending futures price Xend
- Xbeg
while the cash
investment returns initial principal plus interest .
S&Pend
+ dividends = initial cash + interest + Xend
- Xbeg
 Frmla Cost of Carry
Xbeg =
S&Pbeg
+ interest - dividend
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7. Calculations of future price using LIBOR as cost of interest and the info
from exhibit 3 and equation
Xbeg =
S&Pbeg
+ interest - dividend
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September contract December contract
S&P beg
414.87 414.87
Interest(LIBOR) 2.62(3.49%) 6.47(3.56%)
Dividends 2.43 5.52
Theoretical Price(use above eqn) 415.06 415.82
Actual Price (given) 414.65 415.15
Actual minus theoretical (0.41) (0.67)

8. Calculations of future price using Treasury as cost of interest and the info
from exhibit 3 and equation
Xbeg =
S&Pbeg
+ interest - dividend
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September contract December contract
S&P beg
414.87 414.87
Interest(LIBOR) 2.35(3.13%) 5.82(3.20%)
Dividends 2.43 5.52
Theoretical Price(use above eqn) 414.79 415.17
Actual Price (given) 414.65 415.15
Actual minus theoretical (0.14) (0.02)

9. Conclusion from the previous calculations
1) The strategy involving the investment of principal at rate=LIBOR and obtaining
market exposure through S&P index futures will outperform the S&P index by
0.41 and 0.67 .
2) Whereas the strategy involving the investment of principal at rate=Treasury rate
and obtaining market exposure through S&P index futures will outperform the
S&P index by 0.14 and 0.02
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10. Que3) Which is the most attractive enhanced cash alternative?
Ans3) There are two “enhanced cash alternative”
A) The EAFE Swap B) The Inventory Financing
The EAFE Swap
 Purchasing the stocks in the Europe Australia Far East Index(EAFE) basket and
enter into the swap agreement to pay the EAFE total return in exchange for
LIBOR
 BEA would pay the EAFE return on the basket and receive LIBOR plus or minus
(Basic Points)
Refer to Exhibit-4
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11. Cost and benefits associated with EAFE
basket as follows:-
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Description Basic Points Time Period
Round trip transaction Costs 200 One- time
Custody costs 7 Per annum
Securities Lending (20) Per annum (40 basic
points per annum on a
50/50 share of fee)
Net Basic Points 187 One year Holding period

12. Cost and benefits associated with EAFE
basket as follows
Basic Points Year Holding Period
187 1st Year One year Holding period
87 2nd Year Two Year Holding Period
54 3rd Teat Third Year Holding Period
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This is not an attractive investment for an investor seeking enhanced cash returns.
Assumption:- No default risk, it will underperform LIBOR by 187, 87 or 54 Basic
points per annum over different holding years.

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B) The Inventory Financing
The inventory Financing is not an unusual transaction.
 In Exchange for $100 million cash, BEA would receive.
 Portfolio of Japanese stocks worth $50 Million.
 A one Year European option to sell this portfolio back to dealer for $100 million
plus one year LIBOR +40 basic points
Que3)- Second enhance cash alternative is The Inventory Financing

14. The Return on Investment as follows
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Security Lending fee 30 (50 % of 60 basic points)
Dividends 110 (Exhibit 4)
Dividends with Holding Taxes (22) (20% as per Exhibit 6)
Custody Costs (10)
Ticket charges (3.2) ($40 each way on 200 stocks=
$16000)
Total 104.8 approx 105
This comes to 53 basic point on $ 100 million , Resulting in a total return of one year LIBOR (40
points) = 93 basic points . It is the Minimum return to this strategy .

15. Que)4. What course of action would you recommend to BEA?
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Ans.4) As per case there are few strategy that appears to be best for investment.
 Inventory Financing coupled with S&P index futures.
Index futures are risk free because of posting of initial margin and frequent
updating of variation margin.
S&P 500 swap is not safe for investment as mentioned that it is written with a
counterparty rated only “single A” and settled up on quarterly basis only.
Inter linked note is most risky because it is issued by a Single –A rated
counterparty, but also places the investor’s capital at risk.

16. References:-
www.investopedia.com
www.marketwatch.com
www.money.cnn.com
Financial Management By Khan and Jain.
Mentored by:- Dr. Rohit Bansal.
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17. .
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