Cash-and-carry arbitrage

My answer is also 2.21. IMO, the solution to 2008 AM Q6 is mathmatically wrong because e^(A-B) is different from e^A - e^B.
 
Specifically,
316x[e^(0.05-0.06)x3/12] is different from 316x[e^(0.05x3/12)]-316xe^[(0.06 x3/12)]
 
I think I have understood and practiced pretty much everything except this.
Does anyone have a shortcut to remember the formula for cash and carry and reverse cash and carry?
thanks
 
I just remember SBB for c-and-c and LBL for rev-c-and-c
SBB = Short Futures, Buy at spot, borrow cash
LBL = Long Futures , Borrow Commodity , Lend it
 
bell99 Wrote:
——————————————————-
> I thought it was a matter of rounding errors!
It’s a matter of tailing the position by PV of lease costs which should be done from a theoretical landscape.
 
janakisri Wrote:
——————————————————-
> I just remember SBB for c-and-c and LBL for
> rev-c-and-c
>
> SBB = Short Futures, Buy at spot, borrow cash
> LBL = Long Futures , Borrow Commodity , Lend it
Thanks for that.
I also watched this, it helped me understand even though it doesn’t apply 100%
http://www.youtube.com/watch?v=2vT77NE9Bks&feature=related
The spreadsheet that goes with this is here:
http://www.bionicturtle.com/how-to/video/cash-and-carry-arbitrage-video/
 
Paraguay Wrote:
——————————————————-
> bell99 Wrote:
> ————————————————–
> —–
> > I thought it was a matter of rounding errors!
>
> It’s a matter of tailing the position by PV of
> lease costs which should be done from a
> theoretical landscape.
Can you explain what is “tailing” ? I am also confused by the “tailed gold” in the solution to EOC Q1C.
 
I also think 2.19 is wrong.
The lease rate, like dividend, could be reinvested. So one unit of commodity at the begining grow to 1*exp(l*t) units at the end. Then the value of this should be timed by the spot price at the end. i.e., 1*exp(l*t)*spot_T.
Total gain/loss from lease is: (exp(l*t) -1) * spot_T. Instead of (exp(l*t) -1) * spot_0 the answer used and many people here agreed.
 
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