Can someone explain when you factor in the MD Cash (apprx .25) into calculations when switching positions between equity and bonds and bonds and equity?
Anyone?
The duration of cash should be given… it may be zero or .25, etc. You would implemenet when reducing your exposure to fixed income: # of contracts = yield beta (MDt - MDp)/MDf x Vp/Pf(multiplier)
But if you are quickly moving from equity to cash then cash to bonds, do you need to account for the MD of the cash? I have seen some problems incorporate the MD of cash and some others do not. I am just trying to see if I am missing some common thread that would help me distinguish which is the case.
If you are going from equity to cash, the adjustment will be to the Beta of your portfolio: ie Target Beta will equal zero. At that point, you will need to move your “cash” to bonds. To do so you have a target duration and your portfolio duration, neither which of which in this case should equal the target duration of cash. The duration of cash will come into these equations if: 1) you are selling bond contracts to create cash (MDtarget = .25 or zero, etc) 2) Your bond portfolio already resembeles cash and therefore has an MD of .25, zero, etc
sometimes cash has a MD of 0.25 because it’s not really ‘cash’ but really cash instruments that are like cash.