A couple quick questions that hopefully y’all can help me with:
1.) When pricing these derivatives, i understand adjusting the price for monetary benefits (eg interest or dividends) but why are they discounted by the full Risk-free annual rate? That is, if you receive interest in 30 days for example, why is that amount discounted by (1+Rf) instead of (1+Rf / # of compounding periods) ? We used the latter previously when discounting something other than annual periods, no? Seems odd that we use an annual rate to discount a non-annual cash flow.
2.) The text equates shorting to borrowing. How are the two essentially the same? In cash and carry arbitrage, you first borrow the money to buy the security. In reverse C&C, you short first and then invest the money. The term and process of actually “borrowing” is used in the former yet the book relates shorting to borrowing. Which would mean that for reverse C&C you basically start the process by shorting/borrowing, no??
Thanks in advance for any help!!!