Converting equity to bond...synthetically (CFAI exam2)

Bit confused with when to use the cash duration or not, specifically related to the CFAI sample exam 2 (qu 28 I think). In this they are converting part of the portfolio from stock to bonds. In the sample exam the duration of 0.25 is used when converting to bonds (assuming the equity has already been converted to synthetic cash). However…in the curriculum (v 3 pg 113-114) there is an almost identical example when they say that the cash duration should be set to zero for this part of the transaction, to quote, “because no movement of actual cash is involved in these futures market transactions, the modified duration of cash is effectively zero” Anyone explain this? Cannot see any errata relating to it…

Sorry , that should be CFA curriculum vol 5, not 3

If they give you a duration for cash, use that. If not, just make it zero.

I can remember CFAI book examples where you do use the cash duration when going equity -> bonds.

When you synthetically convert equity to bonds, you first want to turn the equity exposure into cash and then convert from cash to bonds. In doing so, use the cash duration if they gave you that in the facts. If not, just use zero as the duration for cash. The same process applies when you convert bonds into equity.

but the question was how many bond futures to buy not change to cash then buy i guess just use it if they give it or hope its the only close answer like on the sample exam…doubt that would be the case bet both would be options

i think the confusion (hence the inconsistency) here is: assuming your current portfolio allocation is 80% equity and 20% bond and you want to set to 50% equity and 50% bond: 1) you would work from current beta to your target beta = 0 (i.e. synthetic cash) and compute how much equity index futures you need to short to reduce your equity holding to 50% 2) next you would work from your current duration to your target bond duration (which is usually assumed 0.25 for bond and not 0) conflict is if synthetic cash = 0 then why from cash to go long in bond futures the cash is reset to 0.25 and not 0.

still confused as this question assumed you already shorted the equity futures now you are working from to increase bond exposure why is (Dt - Dp)/Df Dp=.25 and not zero?

If you are doing futures transactions, it’s just a wash. Your cash sits in the margin account at whatever duration it has and you change your futures position.

is there ever a time when they will give us a cash duration and we shouldn’t use it seems like an easy question if we get it and i dont want to screw it up

same thinking here…this topic quite easy and need to capitalise on this one…

Agreed. I think that I will just used the cash duration if it’s given. I also emailed the CFAI to query this morning. If they come back with an answer (before the exam, of course!) I willl post it.