For converting an equity position to debt by using futures do we need to apply 0.25 as the cash duration when calculating the number of bond futures
yes, i saw it in example questions
in schweser 
thanks!
What is this .25 you speak of?
you have stocks you sell equity futures so that beta = 0 (no exposure to stocks) this means equity “becomes” cash now you increase allocation to bonds, converting that “cash” into bonds with bond futures you use the formula that uses target duration and current duration current duration = duration of that “cash” = 0.25 anyway, they mention in the question “duration of cash = 0.25”, so don´t worry, I guess in this kind of questions they will clearly put it in the question data
it is the cash duration. Schweser SS13 pg 120.
by the way, I guess the example CSK mentions is in page 131 of volume 4 (schweser), question 9
I thought you would use 0.25 only if it is explicitly given somewhere in the question??
AnalyseThis Wrote: ------------------------------------------------------- > I thought you would use 0.25 only if it is > explicitly given somewhere in the question?? I thought that also. In that specific example in schweser, they mention that cash duration is 0.25. If it isn’t mentioned, I don’t think it is wise to volunteer to put the 0.25.
use the cash duration if it’s given in the question, otherwise assume the duration is 0.
If you’re converting to an actual cash position (to address a liquidity need for example, use the 0.25). The idea is that 0.25 is the duration of cash/money market etc. They probably have to give you the 0.25 in this case. If you are converting bonds to equity using futures, don’t use the 0.25. In this case you are not really turning $x million of bonds into $x million of cash – you’re turning it to nothing. Use zero in this case. And here’s the evil twist that CFAI can throw at you – they could give you the 0.25 here, even though it’s not used (or maybe it’s used for another question in the set). You can see this difference by looking at CFAI Exhibits 6 and 7, pages 113-115.
Why would cash have any duration ? $100 is still $100 no matter which way the interest rates move, no ?
by saying cash, they are saying, money-market instruments, think 90-day T-bills that have duration of about 0.25 However, 0.25 duration won’t be technically true duration for 90-day T-bills, since it maybe can be 0.23, so 0.25 is definitely has to be given Same applies to duration of the the swap, when they talk about a party paying fixed (I think it was yearly fixed payment) and CFAI mentions that duration of 1-year zero coupon bond is about 0.6 - 1.0 and then they go and use 0.75, once again that 0.75 will have to be given
sooo for the conversion… equity to cash–> use .25 bond to cash --> use .25 equity to bond…? convert equity to zero and zero to bond (and don’t use the .25)? bond to equity?convert bond to zero and zero to equity (and don’t use the .25)?
For Equity to Cash you use 0, because its Beta not Duration. For Cash to Equity you use 0, because its Beta not Duration. For Bond to Cash you use 0,25 b/c you want the duration of Cash For Cash to Bond you use 0.25 b/c you have the Duration of Cash
equity to bond? use zero for the first conversion and use .25 for the second conversion??
Yes because you reduce Beta of say 2 to 0 for “Cash” then take teh Duration of Cash 0.25 to Bond of say 5. But I have a feeling sometimes they ignore this 0.25 and use 0 instead…will have to wait until I do the problems again to figure it out.
i disagree, as far as equity to bond, you use 0, since you converting equity to cash (i.e., synthetic $, not a money market instrument) and then you use that cash to convert to bonds
Ok, Volkovv I can see that. Makes sense.