Cash

Cash comes in several forms:

• Bank deposits
• Short-term goverment bonds and other high quality bonds
• Money market funds holding the above

The cash interest rate, also called the “risk free rate” is ultimately set by the central bank of a currency. They determine the central bank despoit rate, which is transmitted through banks to everypne.

The main way they determine the interest rate is like this:

• Inflation is too high: increase interest rate
• Inflation is too low: decrease interest rate

To be a bit more precise, the Taylor rule says that real return of cash should be about 50% of the difference in actual inflation and desired inflation.

Since central banks are pretty good at their job the real return of cash is around 0%. Periods of over-inflation and under-inflation also kind of cancel out. There is a lot of discussion about r* (r-star) as well.

Foreign exchange

Foreign exchange isn’t really an asset class by itself. However, the fact that there are multiple currencies with changing exchange rate may be used by strategies.