Cash duration

If the question say we want to reduce the fixed income asset allocation using future for six months , should we put the target cash duration for 0.5 instead of 0? Thanks.

Ie, (MD_T - MD_P)/ MD_F, should we put MD_T =0.5 for cash duration?

I recall that in one past exam (or possibly in an EOC) that the duration of cash was assumed to be different than 0. However, the duration of cash was specified in the question. If the duration isn’t given in the question, then it is safe to assume that the target duration equals 0. At least, that’s going to be my approach.

Word. They should state it in the vignette. If not, use 0.

There was one question where cash duration was given as different than zero and you had to sell bond futures and buy equity futures. With the bonds they used it but with equities they still used 0 without an explanation. Any comments?

Duration in the equity formula? :wink: Cash has a BETA of zero. That’s the zero.

If you are switching from bonds to equity then cash duration is zero.

if you are switching from long term to 6 month bonds you assume duration to be .25 ,because 6 months is half a year and the duration is always lower than the period.

Source: Just read the derivatives exhibit.

I am not quite sure if you can state it that way. It might be too simple. Read the case and every reference to duration and than decide. A 6-months bond should not always have a duration of 0.5/2, only if it has a floating rate, right? If not (fixed rate): 0.75 x maturity should be more appropriate.