Cash has a low duration

Guys, Can anyone explain me this. I understand the reinvestment risk which one faces while holding cash balances ( or for that matter having idle bank balances) you are faced with the risk of investing at a lower interest rates. BUT how does Cash face price risk a.k.a Interest Rate Risk?? is that have to do with the fact that when the interest rate rises we assume the inflation is also on rise and hence the purchasing power of cash goes down ( this i relate to the decrease in price of cash)… am i thinking on correct lines?

cash has a duration of 0. the value of cash is not impacted by the interest rate. duration only measures the impact on bonds with future cash flows.

Billwest…schweser mentions that cash has a very small duration …look up at their risk management with forwards and futures topic where they create sythetic cash and index positions

equity_research_nds billwest is right that in most questions zero duration is used. you are also right that sometimes cash has a very small duration, the way this subject covered in CFAI book is very confusing. drop me an e-mail if you want and i’ll send you the related part from CFAI textbook cfageek@yahoo.com

“cash” as in “I’m holding my assets in cash” doesn’t mean dollar bills in the mattress - it means money market securities like CDs, Bankers acceptance, commercial paper, etc… Those all have durations…

The best way to start my day is to read a Joey post in AF. Too funny …

My mattress also has duration, but unfortunately it’s estimated to be getting longer these days! Darned CFA!

bchadwick, i bet your duration is getting less, if your mattress duration is expected to get longer…