its way too confusing. sometimes they use it sometimes they don’t. i’ll stick to -if they don’t state that duration of cash is .25, i’ll take it as zero and just include a note on the side that duration of cash is very low, close to zero.
volkovv, in problem 9 of R38 in Schweser, they do use beta = 0 when convert equity -> synthetic cash, but then use 0.25 for synthetic cash duration when converting synthetic cash -> bond. Although it does not make much sense to me, that’s what Schweser does.
they are technically not correct, however, I won’t argue for not using 0.25 when its given the assumption they probably make (even though its not mentioned) is after they reduced their equity exposure by $20M, they put that amount to use using a cash-instrument (say buying 20M worth of T-bill futures), after this assumption is made, then sure in order to adjust that cash-instrument position into longer term bonds, you have to assume a duration of a cash-instrument, i.e. 0.25 in this case, which in real life doesn't have to be 0.25 but if right after you removed equity exposure, you gained exposure to bonds, without going to a cash-instrument in the interim, you would go from your equity beta to 0, and then from duration of 0 (duration of synthetic , not a cash-instrument) to a duration of the desired bond
I thought 0.25 was the duration for floating rate bonds, not cash. The idea is that if rates reset every six months, then the average duration over that time should be about 0.25, assuming you don’t know when the next reset is. As for cash, if you put things in 90-day T-bills and keep rolling them, the average duration should be 0.125, since it starts at 0.25 and eventually goes to 0 when the T-bills mature. If you put them in 30-day T-bills, they should be 15/360 duration. I think for cash, they need to tell you what to use.