BEA Associates Harvard Case Solution & Analysis

Q - 1.      How does BEA’s enhanced equity index fund approach work?

Ans - 1.

The working of the enhanced equity index works in such a way that the investor’s investment purchases the stocks in the index, and return on that investment earned in terms of dividend income with capital gains or losses in it and the interest which has to be received by the investor foregone by the investor.  On the other hand, synthetic alternative works such as the investor does not pay anything for his future position, but he  could earn capital gains or losses on the future contracts and in that the investor foregoes the dividend but receives the interest on his investment. In the enhanced equity index fund if the futures are correctly priced then these two strategies would result in identical values, but on the other hand, if the futures are not correctly priced  then these two strategies would result in different values and their directions would be taken by the market.

Q - 2.      Evaluate the attractiveness of the strategy involving S&P 500 futures. How will it perform relative to the S&P 500 all-in?

Ans - 2.

In this index fund the future approach benefit in terms of lower cost such as lower transaction costs against the stock and it also has lower administrative costs. Another advantage of the future approach is that, the interest rates are traditionally above the treasury rate, but they are lower than the LIBOR rate. If the  investor earns more interest than the implied repo rate then the future strategy has outperformed the enhanced equity index fund. The only disadvantage of the future contract is that it has the potential to incur a loss on the stock as the loan fees or loan premium cost. From calculation of the future contract price shown below it shows that the Future contract is not attractively priced and not outperformed the S&P 500 Equity fund. To calculate the attractiveness of the strategy S&P 500 Future, the following table has been calculated using the key inputs  such as: spot price of the future contract, dividend paid at the end of the year, the performance of the Cash market in which further inputs were taken such as Margin at which BEA charges the cost from the investor for issuing the future option. The Treasury bill rate, LIBOR rate and the maturity of the future contract. Further T-bill rate has been calculated using the future price of the option and the spot price of the future option at the time of binding. The agreement plus dividend has been added in it, but as the excel sheet follows the calculation, the formula which has been used in the calculation is altered accordingly to the requirements.

To calculate the T-Bill rate the above formula has been altered and resulted as given below:

S&P 500 All-In

Spot Price






Cash Market

Margin (Given in the case page # 5 second paragraph)


@4.8% margin


T- Bill Rate




Maturity in days




T- Bill Rate Calculation

Future Price


Spot Price








S&P 500 Future

Future Price


Market Price ($20 is commission per contract given in the case on page # 5)


Not attractive Price


Initial Cash


Add: Interest in Cash Market                                2.60


Less: Market Price of Future





Q - 3.      Evaluate the attractiveness of the strategy involving the S&P 500 swap. How will it perform relative to the S&P 500 all-in?

Ans - 3.

The attractiveness of the Strategy involving the S&P 500 Swap is that it outperformed the All-in by 10bps and it is because of this reason that it pays LIBOR -10bps and receives the S&P 500 returns through investments. The working of this Swap is that, it allows the investor to invest in the contractual return where it receives a return through hedging in the foreign market without owning the stock.

The benefit of the Swaps is that it is simple to adopt and the transaction cost can be avoided due to the simplicity of the contracts with reducing the custodian cost as well. The payment of the Swaps contract is netted and only the settlement amount is a  difference in the cash flows that would be settled on the end of each quarter. These payments would be paid in terms of notional amount and the payment would begin with the $100 million and it could be increased and decreased at the end of each quarter on the basis of the return gained from investment in S&P 500.......................

This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution

Share This


Save Up To




Register now and save up to 30%.