Qbank Q ID 88875

Based on Brock’s information, how should traders best take advantage of arbitrage opportunities in Mazakhastan? A) Buy copper, sell silver, and do not trade molybdenum. B) Buy copper, do not trade silver, and sell molybdenum. C) Buy copper, sell silver, and sell molybdenum. I agree with answer A. But in answer explaination, why they used Mazakhastan risk-free rate 3.75% rather than US Rf 5.5%, while price of the commodities quoted at USD? Am I going stupid? Any response please.

This is a good question…

TheAliMan Wrote: ------------------------------------------------------- > This is a good question… Yeah I also think so.

I’ve never really encountered CFA questions like these that are for futures/forwards internationally. I would think one would have to be using the domestic risk-free rate if you are being given domestic quotes. and as I type this, I realize the prices are quoted in Mazakhstan in terms of USD but it would depend on which country you are holding your currency in…

i remember that question and that exlnanation. they explain in the explanation why they use the diff rfr. something about how technically you should use usd but it doesnt matter. read the whole explanation.

The only explanation I see pertains to why they choose to use the risk-free rate versus the risk-free rate plus the extra borrowing cost. I don’t think CFAI will be this ambiguous

TheAliMan Wrote: ------------------------------------------------------- > I’ve never really encountered CFA questions like > these that are for futures/forwards > internationally. I would think one would have to > be using the domestic risk-free rate if you are > being given domestic quotes. > > and as I type this, I realize the prices are > quoted in Mazakhstan in terms of USD but it would > depend on which country you are holding your > currency in… Thank you very much indeed.

I think TheAliMan is right saying “it would depend on which country you are holding your currency in…”. The commodity price quoted at whatever currency, one has to borrow in country where he holding (trading) the commodity. Domestic Rf in comodity futures is relevant. Domestic borrowing cost is cost of carry for riskless arbitrage. Foreign currency Rf is relevant for currency futures, because it require borrowing in one currency and lending in another to ensure riskless arbitrage.

Sorry, I meant to say ‘futures/forwards on commodities.’ I should really complete my sentences…

TheAliMan Wrote: ------------------------------------------------------- > Sorry, I meant to say ‘futures/forwards on > commodities.’ I should really complete my > sentences… Oh no. I did not notice you have written “currency”. I also read commodity until you say this. The point you made in the sentence make me decern the pricing of currency and commodity futures. You deserve thanks for that.