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Quantitative Finance · Glossary

What is Month-end rebalancing?

Definition 17.4 Markets II: Rates, FX and Credit · Chapter 17 — Fixings and Flows

Month-end rebalancing is the trading that investors do at the end of each month, some of it at the 4pm fix, to restore currency hedges and portfolio weights that the month’s price moves have disturbed.

Month-end dollar sales (negative: purchases) needed to keep the hedge of USD 2 trillion of US equities at its ratio, by the month’s equity return and the hedge ratio. The flow is known in sign as soon as the month’s return is. Illustrative; data: the chapter’s tutorial.
Figure 17.3. Month-end dollar sales (negative: purchases) needed to keep the hedge of USD 2 trillion of US equities at its ratio, by the month’s equity return and the hedge ratio. The flow is known in sign as soon as the month’s return is. Illustrative; data: the chapter’s tutorial.

Examples

Example 17.5 (Two month-end flows)

Investors holding USD 2 trillion of American equities, hedged at 50%, sell 0.5×4%×20.5 \times 4\% \times 2 trillion == USD 40 billion forward after a 4% rise. A fund of USD 100 billion at 60/40, after the American part gained 5% and the European part lost 1%, must sell USD 1.44 billion of American assets and buy the same value of European ones.

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