*bump* Anyone know why they sometimes borrow cash and sometimes not?
given that tables 7 and 8 on pp165/166 (v5) show lending and borrowing at r for cash and carry and reverse C&C, if you come across this, just assume to borrow/lend.
Hi, I was also a little confused but I think the reasoning is as follows: The Ansa to 2B considers the Dec2004 forward price as a proxy for the spot price. So the commodity is actually purchased(Long) in Dec for the forward price = spot price of 3.000. If you work it you with the borrowing costs: (sorry formatting does not work- # separates columns) Time 0 # Time = 3/12 Short March FW # 3.075 -S(T) Buy Spot Dec -3.00 # S(T) Borrow Purchasing costs 3.00 # - 3.04534 Pay Storage Costs # -0.03 Total 0 # 0 There is no arbitrage. The transaction is well hedged which means you earn the risk free rate of return of 6%. The question asks for the annualized rate of return which would be what you spent at the beginning and what you earned at the end which happens to be the risk free rate of return. My reasoning: If you are calculating arbitrage profits, then consider the borrowing/lending costs. If calculating annualized rates of return, do not consider borrowing/Lending costs.