Bea Associates

4604 Words Oct 28th, 2013 19 Pages
Harvard Business School

9-293-024
Rev. December 16, 1994

BEA Associates: Enhanced Equity Index Funds
On the afternoon of July 13, 1992, Messrs. Jeffrey Geller and David DeRosa, derivatives portfolio managers at BEA Associates, were considering alternative ways of investing the assets of a new $100 million enhanced index account. They wanted to find the most attractive combination of derivative and cash market positions to achieve the client's objective which was to outperform the S&P 500 stock index by 50 basis points in a low risk manner. The alternatives included the use of over-the-counter equity swaps, a relatively new financial instrument that had proliferated in recent years.

BEA Associates
BEA Associates was an
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The firm also aimed to offer clients a high degree of product customization. In pursuit of these aims, BEA made extensive use of derivative instruments such as options, futures, and swaps.

This case was written by Professor André F. Perold as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 1992 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

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293-024

BEA Associates: Enhanced Equity Index Funds

In its more traditional equity and fixed-income portfolios, where outperformance was sought principally by investing in attractively valued stocks, bonds, and other physical securities, derivatives were used mainly as a low-cost way of controlling market risk and currency risk. In its derivativesbased portfolios, derivative instruments were used much more extensively both to manage desired portfolio risk exposures and, through

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