I always thought this was: (1) Borrow (2) Buy commodity at spot using borrowed funds (3) Short the futures contract (4) Repay loan + interest (and any storage costs) (5) Receive fixed price specified in the futures When i look at the CFAI end of chapter question 2b in reading 38, they do not consider any loan or interest. In question 1b, however, they do assume funds were borrowed and interest is paid in calculating the total return. what am i missing here? assume borrow or dont borrow in cash & carry questions?
You are referring to cash&carry when futures overpriced…could also be underpriced.
yeah, but the example does with cash & carry, not reverse cash & carry, so it doesnt apply in this instance
Just had a look into it: you borrow at 6% in this case…march future price is arbitrage-free…and its normal cash & carry as you said;)
Cash & Carry Arb has the following trades short forward : no initial investment buy and lend the commodity ( you don’t subtract convenience yield as a speculator) borrow the cost of the purchase at risk free rate