Clear— preinvesting in asset classes

In reading 28 preinvesting in asset classes,

the calculation is self-explanatory and simple,

however, since we are pre-investing (expecting an inflow of cash in the near future), where do we get the money now to buy the relevant stock and bond futures?

Additionally, the cost of borrowing is not reflected, at least not explicitly, stated in the examples. Can someone assist on the two fronts?

Think about this some more.

What does it cost to enter into a (market-value, arbitrage-free) futures contract?

Margin? If no cash outlay is required in the first place, why would the curriculum mentioning about the cost of borrowing? Print page 250.

If you expect the cash in 3 months, then you buy a 3 month futures contract. The contract doesn’t settle (i.e. you don’t pay) for 3 months when you’ve actually received the cash.

The difference between this and purchasing a futures when you already have the cash is the risk free rate (if you had the cash today, you would earn the risk free rate between now and the contract settlement).

Thank you, Kiwi.

you remind me of carry arbitrage model.

i will go back to review level 2 materials.

Future price is a function of the risk free rate, convenience yield and storage costs.

Higher risk free rate and higher storage costs => higher futures price

Higher convenience yield => lower futures price

Thanks Kiwi.

In this case, since it is financial asset as underlying, risk free would be the concerns. I am crystal clear about this now.

Thanks Magician 2. I would take margin is ignored under this circumstances.

You’re quite welcome.

It’s not so much ignored as they always assume that you have enough liquid assets that you can post the margin; remember that it’s not a cost.

Thanks for correction again. Yep, it is a requirement, rather than an explicit cost to be accounted for.