Mock 2012 Ques 38 [Rahuls' post]

I can’t post in Rahuls’ thread for some reason, so I post here in a new thread.

Which version of mock do you use? My Q38 is: “The number of Nikkei 255 Index futures Sato must buy to …”. It doesn’t need the cash duration. As for Q37, this is different from what’s in the blue-box example, but it’s similar to another example[a few pages before, not a blue-box example] in the book. When the cash duration is provided clearly, consider to use it! Use Dur=0 may not match any answer.


thnx for looking into it

yes the same que

Current mkt value of portfolio = eq+bond = 27.5+27.5=JPY 55 bil

TAA is 60/40 eq/bonds so to rebalance need to sell synthetic bond future worth 5.5 bil & take an equivalent position in eq

so # bonds contract = (MDt - MDp / MDf x contract price) x Vo, here MDt = 0.25 (normally cash duration is 0 but here it is considered to be taken as 0.25)

=[(0.25 - 4.75) 6.90 * 4,830,000)] x 5.5 X 10^ 9

= - 742. 64 (rounded off 743) so B is the answer correc

Likewise in Q38 it should be = ((1.15 - 0.25) / 1.05 X 1525000) x 5.5 X 10^9 = 3091 # long eq contracts

but in guideline they have used = ((1.15 - _ 0 _ )/ 1.05 x 1525000) x 5.5 x 10^9 = 3950 ( answer B)

Que is why cash duration = 0.25 not being used???

i meant cash duration is 0.25 (as specified) is used for bond. So it should not imply that cash beta is also equal to zero.

but for eq position Current beta is 0 coz it doesnt say that. U tend to use cash as 0.25 in both positions…

what is the Q 37.

it is a reduction in Portfolio Duration. So there you are getting Cash. Hence Cash Duration is used.

Q 38 - is a modification in the Portfolio asset mix. Though you effectively end up selling Bonds, get Cash and then invest in Stocks (or whatever the circumstances are), the key difference is - at the end you want NONE of the portfolio duration / beta on the component … so beta / duraton MUST reduce to 0

In the change in allocation mix - you are TAKING OUT THE COMPONENT COMPLETELY. If you used the 0.25 - you are still leaving some portion of the risk inside.

cpk123 you are a champ :)…thnx fr the help

The beta’s of cash, cash equivalents, synthetic cash, and risk free assets are all zero’s. I haven’t seen any exceptions till now. beta=0.25 is too large for cash.