Fundamental Rules of Arbitrage

CFA Level II Derivatives
#1

|Rule 1| The arbitrageur never uses her own money to purchase the underlying security and always invests any proceeds from short selling transactions at the risk-free rate.|

|Rule 2| The arbitrageur does not take any market price risk on the total trade, but individual components of the trade may involve price risk.|

Question: Are the comments regarding fundamental rules for arbitrageurs most likely correct?

Answer: Yes

I answered that comment 1 is incorrect because, for example, reverse carry arbitrage does not invest proceeds from short selling at the risk free rate, the proceeds are used to by a long futures position in the asset. What am I missing here?

#2

No, they’re not.

There is no initial cash outlay for a (market) futures contract.

If the proceeds from the short sale are used for the margin account on the futures . . . well, then they’ll be invested at the risk-free rate. That’s what the clearinghouse does.

#3

I just had a duh moment after reading this. Thank you for providing an explanation with real world context. Very helpful!

#4

My pleasure.

It happens to us all.