Portfolio Objectives Based on Future Cash Needs and Currency

Summary

The document questions whether portfolio optimization should focus on present value in a base currency or on meeting future liquidity needs in specified currencies. It motivates the question with observations about negative interest rates and the relative value of present outflows and future inflows, and mentions intertemporal marginal substitution in contexts such as pensions. It also distinguishes modeling a margin rate from modeling the entire rate structure.

As an alternative objective, it considers minimizing errors in future liquidity and asks whether prices should instead be scaled in units of a future bond, when the goal is to maximize the number of those units. The excerpt is exploratory: it offers no utility specification, optimization method, empirical evidence, or resolution. Its concepts frame a liability-aware portfolio design problem, but it does not establish when future-cash-flow objectives outperform base-currency present-value optimization.

Key ideas

• The document contrasts maximizing present value in a base currency with matching future liquidity needs.
• It raises currency-specific future cash flows as a possible portfolio objective.
• It asks whether expressing value in future bond units could better match the intended investment goal.
• The excerpt poses conceptual questions but gives no optimization method or evidence to resolve them.

Tags

# Should portfolio be optimized by marking to the future than marking to market (excluding currencies)?


# Should portfolio be optimized by marking to the future than marking to market (excluding currencies)?












Observing the negative interest bonds in Switzerland, Denmark, GErmany the value of higher presently (credit-free) outgoing cash flows seems less important than the value of lower future (credit-free) incoming cash flows, when the time of the flows is chosen. This is also the case for intertemporal rate marginal substitution (eg: pensions), but such a model is used to model a margin rate and not the whole rate.

When using an utility function for example, does it make sense to optimize the portfolio not to maximize prezent value in base currency, but to minimize the error to get future liquidities right in the currencies of interest. Or you do not scale your prices to the base currency at all, but to future number units of a bond, which is the number you try to maximize.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.