Why are they not Borrowing? P204, Book 5 #2b,c

Why in the cash and carry arbitrage are they not borrowing to buy the widgets as in the other problems (1 b&c, 3)?

Why is it not

Short 2.75-St

Buy Spot -3.00 St

Borrow Spot 3.00 -3.14

Pay Storage - .03

Pay Storage - .0305

Pay Storage - .0309

Total -.4814

I don’y know if this is a dumb question or not, Im just trying to get to “why do we not borrow in every case”, or “how do we know when to borrow”

In 2b, we would have borrowed at roughly the same rate we earned and and arbitrage would have been 0

Ugh, then in the next one, (problem 3) , they borrow the storage costs too, which makes my above math even more unilke the next problem…

in one of the problems they are trying to calculate the return available to the user of the transaction… so they are not borrowiing for that one.


same ques again. Pl search first

does anyone know whether these types of questions have featured in past exams (without violating the Code and Standards regarding disclosure of exam info :P)?

I have not done an analysis of past exams but this appears more of a PM multiple choice q’s

On this type of question , if it came in an AM exam , presumably the answer would depend on the key words used in the question . such as “calculate” ( a return ) or “show” or “demonstrate” ( arbitrage holds )

On a PM question , they may ask for return as different from arbitrage return.

Not sure , but the EOC questions appear more to prod you to relate to the material instead of asking you the question in a stock kind of way.

i have done a quick search across 2011-2010 am exams…they dont seem to bother too much abt these topics…even in the reading they felt sort of introductory (but annoying)…but you never know.

I may be wrong. Here is my understanding.

1.B asks for the return in $. (since the return in % is meaningless for a cash & carry arbitrage).

2.B asks for the rate of return, which should include all the items but the borrowing. It this rate of return equals to the borrowing cost(risk free rate) if it’s arbitrage free. It this rate of return is greater than the borrowing cost, the arbitrager makes profit.

It is becasue its asking for return -




Rahuls was right, I shoudla searched first, although Im not sure he has used thie forum before, givien the redundancy that systematically takes place. Lol. I’ve never seen a duplicate “what are the best study materials” quesiton, have you? :slight_smile:

Nice to to keep the links posted here. Sometimes I could get confused by the answers. Hope this is the last thread for the questions. :slight_smile:

One more question related to cash and carry(I am not sure if this question has been posted or not):

On page 207. In the reverse cash and carry arbitrage table, there is a line of “Receive storage cost +0.05”. How can the arbitrager receive the storage cost?