CFAI (vol. 3, p. 251) says that a passive position can be implemented through “a derivatives-based portfolio consisting of a cash position plus a long position in a swap in which the returns to an index representing that asset class is received”
So for those of us who don’t trade derivatives everyday, is the “cash position” jargon meant to imply outright ownership of the asset? i.e. owning a corporate bond and swapping the coupon for the returns of the corp bond asset class?
If that’s what’s implied, what is the economic rationale of that trade? Are they simply describing a way to enhance returns when one has a strong view? Or maybe is it a hedge for the risk of the asset underperforming its asset class?
I think the “cash position” is just collateral you post with the broker.
there should be no reason why you couldn’t open the swap and then pay or receive the difference between the index/coupon every 6months.
the rational is that swaps can last longer than forwards.
e.g. the longest e-mini futures I see are for dec 2016.
with a swap you could agree to a 10yr term with semiannual payments. so the costs are lower than using forwards, and also lower custody/transaction costs than the underlying stocks or using an eft.
can’t think of other reasons- maybe you own a large bond position in a certain company for control reasons? and you prefer to have a 60/40 portfolio?? dunno
By “a cash position” they mean that you’ve invested in risk-free assets; e.g., US Treasuries.
You enter into a swap to pay the risk-free rate and receive the return on the asset of choice.