Being "Short cash" - what does this mean?

[Ryan S]

In P2.T5.67 Mapping Options,

question 67.1 notes being "short cash (e.g., USD Bill)" in the question and answer. I recall reviewing this for part 1 but I'm now confusing myself on what exactly being "short cash" means economically. Can anyone please explain this to me? Is being short cash equiv to being long a T bill?

My earlier thoughts - that being short cash equiv to owning a T bill (long treasuries) is because by holding cash its value declines with time (so you are long cash), but owning a treasury with time you should grow at teh risk free rate.

Now I am second guessing this completely. Please help! Thank you.

Ryan

 

[ShaktiRathore]

Hi
Short cash is equivalent to being short a treasury bill, its like if u short an forward u need to sell the asset in future u r short on asset similarly if u are short a t-bill u need to sell/give cash in the future in terms of face value which is equivalent to being short a cash. U can also see it as borrowing cash because when u short tbill u borrow cash to pay it back later.so when u are long cash u are going to receive it like long in tbill whereas if u are giving cash in future u are short cash like short in tbill.
Thanks

 

[David Harper CFA FRM]

I sometimes get hung up on this concept of short cash, too. If it helps, I actually like to think about the capital market line (CML); for example, let's say the risk-free rate = 4% and the market portfolio (of risky assets) = 10%. Then consider three simple allocations:

• 100% invested in cash: return =4%; if we invest, we are lending cash. We are 100% long cash.
• 50% cash and 50% the market portfolio; return = 7%; we 50% long cash and 50 long the equities
• 100% market; return = 10%.
• 150% market and short 50% cash; i.e., we borrow cash in order to invest + 50% in the market, for expected return = -50%*4% + 150%*10% = + 13%. This is leverage achieved by borrowing: a short cash position

Or, just mundanely, as Shakti implies, the treasury bill is a proxy for cash. If we think the t-bill return is good, relative to other investments, we'd invest (go long) the t-bill (cash). But let's say we think, in today's current zero-interest rate (ZIRP) environment, that we instead think the return on cash is lame (in real terms, maybe it's negative!). In that case, we'd borrow (go short) cash in order to invest in non-cash assets. In fact, this was the theory behind the "wealth effect" of the Fed's lower interest rates: by keeping rates low, they discouraged a "long cash" investment choice by wealthy investors and wanted to see a "short cash, long risky assets" choice by wealthy investors. FWIW. Thanks,

 

[Ryan S]

This is great. Thank you both.

Ryan