Thank you for the reply.

 

But if in my portfolio I have cash and because of daily Mark to market
my cash position would reflect my earnings from my futures position.
Isn't it sufficient to simply the compute the returns from Cash which
includes the changes from futures position?

 

Even for the forward position my cash would reflect it. If I have a
entered into a forward contract my cash would go up by the position
times the premium amount(?)

 

So I cant individually compute the returns from a future position or a
forward position without somehow including my cash position?

 

Regards,

Ravi 

 

 

 

-----Original Message-----
From: Brian G. Peterson [mailto:brian@braverock.com] 
Sent: Monday, January 28, 2008 4:04 PM
To: Ravi S. Shankar
Cc: r-sig-finance@stat.math.ethz.ch
Subject: Re: [R-SIG-Finance] Compute Portfolio Returns

 

Ravi S. Shankar wrote:

> I have in my portfolio cash, equity, futures and forwards. I need to

> compute the returns of this portfolio. 

> 

> If say I have cash of $100 and I buy only equity then my weights would

> be the amount invested in each stock upon the total cash and the sum
of

> weights would add up to the total cash. The returns computation would
be

> a straightforward change in investment.

 

price * position size (in shares) = position value

 

You can, as you've noted, back into weights this way.

 

> However, I need help in understanding how do I compute the returns
(and

> the associated weights) from a futures position and a forwards
position.

> 

> a)       In the case of futures there would be a daily change in the

> cash position due to Mark to market. So would the change in cash

> position reflect the returns of futures position?

 

With the futures position you will always calculate the notional value 

to mark to market. For most futures contracts this is the price * a 

multiplier.

 

Change in notional value is your return (in currency units like US$ or
EU).

 

> b)       In case of forwards how do I compute the weights and the

> corresponding returns? I cannot use the change in investment as there
is

> no initial investment and if I use the change in investment approach
to

> compute returns I would have infinite returns. 

 

With a forward contract you would use the difference in price between 

the forward contract face price and the current spot (market) price to 

calculate the current "premium price" on the contract and use the change


in premium price to calculate your returns.

 

> Any help would be appreciated (please let me know in case there is a

> paper which I can refer to)

 

If you do not change your positions from your initial position, then 

your starting weights do not change, but your actual weights will float 

daily (or whatever your observation time is).

 

If you need the calculations for calculating returns from prices (or 

price*multiplier notionals), look at function Return.calculate in 

PerformanceAnalytics.  Or if you need the method for calculating 

weighted returns from "prices" and starting weights, let me know.

 

Regards,

 

    - Brian

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