don’t use cash instrument in replication strategies

update — use “bank account” …

Beginners like me often intuitively use cash positions when replicating some derivative position such as a fwd, option or swap.

I think that’s permissible in trivial examples, but in the literature, such a cash position is replaced by a bond position or a MMA. I think the reason is, invariably the derivative position has a maturity, so when we lend or borrow cash or deploy our savings for this replication strategy, there’s a fixed period with interest . It’s more like a holding a bond than a cash position.

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