CFA L3 actual exam 2012, Q.8 (synthetic cash duration 0 or 0.25?)

CFA Level III Derivatives
#1

I’m going through previous year exam which is at CFA Institute website. In question 8 they ask to reduce equities exposure in portfolio and increase bonds exposure using derivatives

as I thought till now, when we adjust equities for synthetic cash and then use this synthetic cash to increase exposure to bonds, we use 0.25 as duration for synthetic cash in formula.

BUT CFA Institute in answers shows calculation as if synthetic cash duration is 0. Please help me with that, I WAS NEVER SO CONFUSED!

#2

use 0

#3

The key here is to use what is provided. If no information is provided then assume duration of cash is 0.

The 0.25 example is based on IF the exhibit specifically states cash free instruments have duration 0.25.

#4

Do we have to use 0 for duration of cash at both times,converting from equity to cash and then synthetic cash to bond ? Assuming cash duration given 0.25

#5

Converting equity to cash you don’t use duration. You use beta. I have yet to see a non zero beta so far for cash.

When converting cash to bond, then you use the cash duration.

#6

^^ true.

#7

Use zero for either beta or duration adjustments unless they specify a different assumption.

#8

Ok, will use 0 if no info provided

Good luck us all tomorrow!

#9

Got it… Thanks g3r41d … Good luck to all