# Duration of Cash

Do we only allocate for the duration of cash when moving from bonds to stocks? That is what I thought and Schweser had a problem where they accounted for the cash when moving from stocks to bonds? Any clarification would be appreciated.

the concept “duration of cash” seem to be used only by Schweser, not in CFAI text

hk, thanks. I will go into the text tonight and do a couple of review problems. Now if I could only sort out the differences between the yield beta and conversion factor.

I guess we can assume duration of cash is always zero.

hksteven Wrote: ------------------------------------------------------- > the concept “duration of cash” seem to be used > only by Schweser, not in CFAI text No! It is on the CFAI materiel as well ( CFAI, volune 5, exibit 7, page 337) They clearly explain it. When to use should be pretty clear. I know sometime it it coufusing as when to use it or not. I hope they do not give it in the exam.

If you are moving from Equity to Bonds or bonds to equity, you have to go via cash, assume duration of cash is zero. If you are staying in cash, assume duration of .25.

I think if they give it to you use it, if not use 0. My hedges were off just a bit until i saw they used it, it had the duration for bills as .25 and I used 0 instead.

The reason why I think cash duration coud be 0.25 is bec of investing in short term 3 months Treasury bill (most liquid asset instead of leaving it as idle cash).

They give it to you, if they do not, it is assumed to be zero.

Specific question from CFAI - Vol 5 - p. 359 Question 4- Why do we not use the duration of cash when switching from bonds to equity? I thought when moving from bonds to equity that you were supposed to convert the bonds to cash first and then to equity. Any thoughts on this?

@outq13 Where is the confusion? I did this question in 2 steps. First I changed the allocations, so for that we take \$20m of stock beta 1.15 to 0. Then we take \$20m of “cash” to 6.75 duration. After that step I adjusted the beta and duration of the new allocation. Took \$170m of stock beta from 1.15 to 1.20, and took \$30m of bond duration from 6.75 to 8.25. Then you net all of the futures contracts. Make sense?

When you move from bonds/stocks or vice versa, you don’t have to go to cash first. This is confirmed on the CFA mock.

I understand how there are 2 parts. First changing the allocations and then adjusting the beta and durations. However, if we look at the first step in regards to changing the 40 million of bonds into equity. I thought you would do the following: (.25 - 6.75 / 5.25) * (40M/109,000) and then convert the 40 mil of cash into stock (1.15 - 0 / .95) * (40M/157,500) The answer shows (0 - 6.75 / 5.25) * (40M/109,000)

Where do you get .25 from? It is not in the question anywhere?

Here is a quote from CFAI book on page 336. “Because no movement of actual cash is involved in these futures market transaction, the modified duration of cash is effectively equal to zero.”

0.25 is in the cFAI text

ng30 Wrote: ------------------------------------------------------- > When you move from bonds/stocks or vice versa, you > don’t have to go to cash first. This is confirmed > on the CFA mock. I think you are confusing the answer to Q46. Q46 deals with changing allocations between 2 equity portfolios. In Q45 of the mock, they do specifically go from Equities to Bonds and go through cash in between. They use a duration of .25 for cash (and it is given in the mock). I’m not sure if this helps or not. Seems to me that if you are going between equities/bonds you need to go through cash. It looks like you use a cash duration if it is given, otherwise it is 0. On that note, Q45 of the Mock references a cash equivalent of T-Bills and gives the duration of .25. Perhaps if you actually use cash and not T-Bills then the duration is 0?

With respect to question 4 (referenced above) I went back into the text and saw that Exhibit 7 on page 337 of Volume 5 goes over an example that is quite similiar. First, they move 10M from to cash and then they modify the duration of the remaining portion. The only difference in the problem is that they do not state the duration of the cash instrument. Should we only factor that into the question if we are provided with that information? Just trying to make sense of this.

btt - anyone on this?

Page 335 vol 5 CFA book do indicate “Because no movement of actual cash is involved in these futures market transaction, the modified duration of cash is effectively equal to zero.” But, the problem 45 of the mock is exact the same case, go from stocks to bonds and they do use the cash¡¡¡¡ even CFA institute is confused¡¡¡