Can someone explain the 2nd part? 1. Buy the long forward (pay 313 at expiration). 2. Borrow Copper & Short it at 316 today. Now it must be returned at expiration. What is the future spot price? How is that determined in the solution? 3. Invest proceeds from the short in a zero-bond at 5% to pay off the forward. thanks, and may the force be with you tomorrow!!
Just finished this exam. Totally blacked out when i saw this one. What are chances they got it out of their system last year and we don’t see it this year??? damn you cfai…
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I know that the short needs to covered at maturity & it has to be cheaper price since it was expensive to begin with. How do I find the price at the maturity?
I just think of it like this…best to graph it out Time 0___________Time 3months Short Copper + 316__________________-St Lend Proceeds -316_______________+319.97 Pay Lease Rate ____________________-4.78 Buy Forward ____________________St-313 ______________________------------- _______________________2.19 Does this make sense? You don’t need the price in 3 months for copper. You deliver in 3 months, the asset that you buy forward.
cdogstu77 Wrote: ------------------------------------------------------- > I just think of it like this…best to graph it > out > > Time > 0___________Time 3months > > Short Copper + 316__________________-St > Lend Proceeds -316_______________+319.97 > Pay Lease Rate ____________________-4.78 > Buy Forward ____________________St-313 > > ______________________------------- > > _______________________2.19 > > Does this make sense? You don’t need the price in > 3 months for copper. You deliver in 3 months, the > asset that you buy forward. Awesome. This is much better than CFAI’s strange answer. Last request: I am paying the lease rate because??? I shorted, but since I am not a user of Copper, I am paying the owner to hold it for me??
Just remember that if shorting, that you have to pay either a lease rate or convenience yield. This is a benefit that the holder will receive and since you are borrowing the asset, you must repay the holder this amount. It’s very similar to a situation in which you short a stock and you have to pay the dividend yield. That’s how i remember it.
cdogstu77: Thanks for answering at this late hour. Good Luck with the exam tomorrow.
No prob…you too abacus!!!