2018 exam question 3C

CFA Level III
#1

Does anyone know why the cash reserve has to increase? I don’t get the explanation.

i would argue that with monthly averages you have a similar effect to the smoothing rule - as such even if assets increase or decrease significantly in any month, it’s just 1/12th of the total impact and as such you need lower liquidity as uncertainty is removed.

the annual setting - you could face a very strong unexpected December and for that reason you have to hold a high cash reserve throughout the 4 th quarter.

#2

If the required payments are just the MV(beginning of year), the cash need is known at the start of the entire, and throughout the year. If it is changed to be based on an average of the 12 months, the required payments, and hence cash requirement, is unknown, and literally changes month to month. If suddenly the fund gained 50% in one month, it would have to pay out much more in gifts/scholarships/etc.