Monday, April 30, 2012 7:31:48 PM
Ok Clive, I have looked at your remarks on leveraged funds:
1. The leverage is on the price change. . .Got it!
2. Let assume a 2x Leveraged Fund F2 starts up. . at that point it has the same price, say 100. . .Price changes have not yet happend. At the end of day 1 we have this with a 20 % rise on F:
F= 120
LF= 140
Day2
F= 144
LF= 168
If the price drop the right amount on day 3(-12.5%) the prices are identical again. . .this to get the "hang" of what happens
F= 126
FL= 126
If the price keeps dropping FL approaches 0 more rapidly that F.
I get the logic on investing X2 in F and X in LF as one needs more Reserve as prices drop and as prices rise the payout is larger from the selling.
3 As I understand it a LF is a derivative of F. What happens at some profit position at which Fund F pays a dividend of $ 1 per share. What happens then for Fund LF? Does this also pay out a dividend at some leverage and if Yes, how is that calculated?
4 "You invest $500 in 18 month treasury's, $500 in a 2x fund
The funds borrows $500 (at 18 month treasury yield) and invests $1000 in the 1x."
I do not get this. If I pay the Broker $ 500 to buy the LF then from what party does the broker borrow the other $ 500 to invest $ 1000 in F. What is the gain? If the broker wins $200 he has to pay that to me if the price rises and I sell: I have then $ 700 and he has a debt of $500(commissions not counted). If the price drops and his value goes to $ 800 I also lose $ 200 having left $ 300. The broker pays $ 300 to me and the $ 500 back to the lender + interest. The broker only collect the commission on the Trades - his borrowing cost. Is this the only thing the broker gains from it????
Am I missing something?
1. The leverage is on the price change. . .Got it!
2. Let assume a 2x Leveraged Fund F2 starts up. . at that point it has the same price, say 100. . .Price changes have not yet happend. At the end of day 1 we have this with a 20 % rise on F:
F= 120
LF= 140
Day2
F= 144
LF= 168
If the price drop the right amount on day 3(-12.5%) the prices are identical again. . .this to get the "hang" of what happens
F= 126
FL= 126
If the price keeps dropping FL approaches 0 more rapidly that F.
I get the logic on investing X2 in F and X in LF as one needs more Reserve as prices drop and as prices rise the payout is larger from the selling.
3 As I understand it a LF is a derivative of F. What happens at some profit position at which Fund F pays a dividend of $ 1 per share. What happens then for Fund LF? Does this also pay out a dividend at some leverage and if Yes, how is that calculated?
4 "You invest $500 in 18 month treasury's, $500 in a 2x fund
The funds borrows $500 (at 18 month treasury yield) and invests $1000 in the 1x."
I do not get this. If I pay the Broker $ 500 to buy the LF then from what party does the broker borrow the other $ 500 to invest $ 1000 in F. What is the gain? If the broker wins $200 he has to pay that to me if the price rises and I sell: I have then $ 700 and he has a debt of $500(commissions not counted). If the price drops and his value goes to $ 800 I also lose $ 200 having left $ 300. The broker pays $ 300 to me and the $ 500 back to the lender + interest. The broker only collect the commission on the Trades - his borrowing cost. Is this the only thing the broker gains from it????
Am I missing something?
Conrad Winkelman
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