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Name: Glyn Holton
Affiliation: Contingency Analysis
E-mail: glyn@contingencyanalysis.com
Date: 06 Dec 1997
Time: 21:03:11
In selecting a definition, it is usually worthwhile to decide what we want to use the definition for. After all, the definition is supposed to serve us … instead of us serving the definition! For example, if we are defining "cash" for the purpose of defining position limits (i.e. "The portfolio will never be invested more than 20% in cash.") we may define "cash" differently than if we, say, wanted to use a definition to characterize the participants in the cash markets.
A very general definition of "cash" might be: "liquid, high-quality fixed income instruments with (an absolute value of) duration of less than one-year." I use "duration" instead of "maturity" to preclude such instruments as inverse floaters. A number of institutional investors got burned in the early ‘90s by inverse floaters in their "cash" portfolios.
Of course, my definition isn’t going to be right for everyone. For example, if price stability is the essential characteristic you are looking for, you might want to include floaters in your definition … despite the fact that these may lack the liquidity of other "cash" instruments.
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