Hi guys,
Do those sample exams provide you with answers with detailed solutions like schweser or at least some explanation like Mocks? Also, can I print out those papers after I finish them? Thanks!
yes to both Steve
Thanks pupdawg82!
The lender saves the storage cost . In return the lender/buyer pays the borrower/seller a lease rate. This is like a negative dividend ,because the lease rate is owed to the lender.
Physical gold buying / then lending should only happen when lease rates are below the storage costs of gold, so that the lender borrower can save money on storage costs by having to pay less lease rate
WHo is the lender? Is it the person who bought spot gold in time t and shorted the future in time T+1?
I may sound like an idiot here… so please excuse me! If you execute an exposure to gold thru physical buying, wouldn’t you have to pay the storage costs? If storage costs are below lease rates, then it would be benefical to just keep the physical gold rather than lend it out, am I right? The question referred to in what circumstance would we just buy the gold.
Oh wait. If lease rates are higher, you would then want to lend out the gold and get the net lease - storage benefit rather than just paying the storage costs. I think I just got it.
Andy, don’t worry about it until you take #2 tomorrow. IT’ll make sense when you see the question. it’s number 60.
Wait no, I’m wrong again. If you short spot/long forward, you’d have to pay the lease rate while the long spot would take on the storage costs. If the lease rate > storage costs, it’s not worth it to lend it, and would be more beneficial to just store it. My head hurts 
I think going by what people are saying about the q in the test , it’s not necessarily any forward price driving the argument . Its only storage costs versus lease rates , and buying spot gold versus buying a futures contract.
Buying spot gold instead of futures is only attractive if you can overcome the cost of storage. And the way you overcome is by paying a smaller amount to the borrower to take the gold off your hands .
lender pays lease rate and saves storage cost. If he cannot save money by paying less in lease rate , he should go for gold futures
J, that made a lot of sense. I just have to not think of it as a cash and carry question. Thank you so much for spelling it out in the last post, that’s an immense help. I’ve been brooding over this Q since I reviewed my sample #2 and it had been driving me nuts.
still not clear who is lender. Buying gold @ spot makes you a lender but you pay a lease rate to loan out your gold? I thought you borrow money at Rf to buy the gold at spot.
storage is costly . Ideally you want the commodity price appreciation as the owner of the gold , but want nothing to do with paying storage costs. You find a borrower who can take gold off your hands and pay storage costs on your behalf.
In return for such a service you pay this borrower a lease cost. Now you have ownership of the gold at a cost of Rf and the lease rate of the gold. The Rf is foregone , nothing you can do about it . You now want lease rates as low as possible to save on total costs until you are ready to take possession and deliver the gold on the short forward contract .
The situation is exact opposite for borrower . He earns his way by collecting lease on the gold . In return he has to pay for storing it .
plan to do it tonite.
plan to do it tonite.
Very Tough
can only get 60% for the 1st
Janiski, what you describe Doesnt make any sense to me. If what your saying holds, then how come we remove lease rate from the future Price in the same way we remove convenience? We do the same thing with stocks, we lease them out but the only difference is that in figuring out a lease rate for stocks, there are dividends. Everyone assumes the sample exam is right. What if it is wrong? I noticed other mistakes.
I think J has right idea but confusing some terms lender and borrower. Plus I need to see the question as well just to make sure. I will do this sample tonight. If anyone has exact wording let me know. But in text the forward price is similar to what Yabba described (+Rf - lease - convenience + storage). So I am borrowing (aka shorting) gold today I have to pay that lease rate to the owner (like if I shorted a stock). If I am buying gold today and selling it in the future, I dont see why I want storage costs high since buying it today means I take posession means I have to pay storage.
F=Se(r-d-c) + FV(storage)
or something like that
Andy, you’ll understand the confusion when u do the question. The answer seems to reverse the relationship and tell you that you should buy the spot when the lease rate is less than the storage cost. I think it is a mistake and that you would buy the spot when the lease rate exceeds the storage costs because you, the owner, are responsible for the storage costs. Dont know where testrac got this rubish that you can save on the storage from leasing out the commodity. The only way you forgo storage is by buying the futures instead of the spot.
Gold has no convenience yield that I know of.
In stocks the lease rate is the dividend . In stocks there are two types of return , dividends ( lease ) and growth The owner of the stock gets both . The borrower of the stock pays both.
In gold there are three types that can affect total return. Growth ( commodity discount rate for appreciation ) , lease and storage. ( if you buy and store or borrow and store , you pay storage . If you buy and lease , you pay storage and earn lease. If you borrow and store , you should be leasing it back to the bank that is doing the storage , so you don’t have to pay as much to store )
If you own gold you get the growth or appreciation . If you control gold ( i.e. have physical possession ) you pay storage and you can earn the lease rate .
F0,t (no arb ) = S0e^(r-lease+storage) when a lease market exists for gold
In the above the borrower of gold , usually a central bank who borrows it from a bullion bank , pays the storage cost to the bullion bank. I retrun he expects a lease rate from the bullion bank.
The bullion bank who is the lender saves costs because the borrower pays him the storage costs. In return the lender pays the borrower a lease rate. The lease rate has been persistently negative for last two years , because physical gold price has risen a lot , increasing storage and insurance costs . So instead of the bullion bank paying to lease it, they are charging to lease it. This means that it is now cheaper for the speculator to just go long forward Gold instead of engaging in borrowing and leasing.
Janaski, i just checked page 171 and it looks like you are correct. Cfai explains that in equilibrium, storage should equal the lease rate or else the borrower of the commodity would be paying you more than it costs to store when he can just buy the commodity himself. Forget what i said before, i am wrong.