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.
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)
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.
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.