Who else had trouble with this? I don’t think I reviewed this in the last 5 months and the time pressure prevented me from getting through it. I’m hoping that everyone else missed this and question #11 (the last q in the AM) so that the curve isn’t working completely against me.
left it blank
Terrible answer for me, though I probably got the convenience yield part right, and 2 of the three legs. Time pressure.
1/2 to 2/3rds correct. i dont think you needed to study this in order to know how to do it. that being said, this obviously should not have been on the exam. how can they have one question on bond immunization and an entire item set on reverse cash and carry? its a joke.
I was so mad at this question, because I knew I knew how to do it, but it just evaporated on me. I think I might have struggled out a marginally acceptable answer.
Someone also needs to explain to me how you get that calculation question from the LOS which is to “identify and explain the arbitrage situations which arise as a result of the convenience yield of a commodity.”
bchadwick Wrote: ------------------------------------------------------- > I was so mad at this question, because I knew I > knew how to do it, but it just evaporated on me. > I think I might have struggled out a marginally > acceptable answer. Same with me; and I forgot to write the third leg before I moved on. I was trying to catch up with the clock and I was about 4 minutes behind and I rushed through this one. This one and VWAP/Imp Shortfall I royally botched.
Got the first and third part but left the calculation blank due to lack of time.
How is that calculation done with a lease rate on the commodity, while we’re thinking about it. I know short spot and invest at Rf, and long the future… where does the lease rate come in?
If you short the spot, you are borrowing it from somebody. If there is a lease rate, then they are going to charge you the lease rate because, uh, you are leasing it from them.
JoeyDVivre Wrote: ------------------------------------------------------- > If you short the spot, you are borrowing it from > somebody. If there is a lease rate, then they are > going to charge you the lease rate because, uh, > you are leasing it from them. yeap so just substract lease rate, compound spot and substract future from it, here is your arb
JoeyDVivre Wrote: ------------------------------------------------------- > If you short the spot, you are borrowing it from > somebody. If there is a lease rate, then they are > going to charge you the lease rate because, uh, > you are leasing it from them. Ah, makes sense. Now if I had five minutes to figure that out, I might have been able to do it. I just wrote the T0 and T1 parts with the other three elements. I knew the lease rate was involved in there somehow, but ran out of time.
Calculation of arbitrage profits was an illegal question based on the LOS, but of course that will get nowhere with CFAI. Which is extra annoying, given their fusty definitions of all the verbs.
I was a bit stumped as to what to include as the two synthetic components. The short copper / long forward or the long risk-free / long forward. I went with the latter. Took 10 seconds. Literally wrote “buy the risk free bond, go long the forward”. In terms of the calculation, I just banged the number into the formula with a lease rate of 6% and got 3.1521. So then I just wrote: “a profit of 2.21c / lb” All the time I saved I then lost on a very long explanation as to the impact of the bigger lease rate on the no arb range.
emarkhans Wrote: ------------------------------------------------------- > Calculation of arbitrage profits was an illegal > question based on the LOS, but of course that will > get nowhere with CFAI. > > Which is extra annoying, given their fusty > definitions of all the verbs. thanks for this, i just burst out laughing. i have to agree with the “fusty” (LOL!) definitions. i seriously can’t tell what we are responsible for half the time after reading the LOS. they should really clarify this – it should only be “discuss” or “calculate” or both. there is no need for “demonstrate,” “evaluate,” “anally probe,” etc. it’s gotten out of control.
is the profit just S_0 exp((riskfree rate - lease rate) * T) - F ?
Etienne, got the same result. couldn’t figure out whether to go long or short either because I didn’t remember which one was a REVERSE (!!!) cash and carry. got the 2.20 as well. Hoping for partial credit.
Was this a 9 point question? I’m trying to identify and explain the number of points to take as a write off for my dreadfully sub-prime answer.
it was more than 9 points. i think it was closer to 14. 4, 4, 6 i think. i could be wrong though.
Etienne Wrote: ------------------------------------------------------- > So then I just wrote: “a profit of 2.21c / lb” > that number sounds very familiar to me, i’ve seen it before in my recent life experiences