Cash and Carry ..... when NOT to borrow at T=0?

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truemarketmaker

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I’m stuck at cash and carry again..
Please refer to Reading 33 page 203 question 1 and 2.
As far as I understand, in order to apply cash and carry strategy,
At T=0, borrow money+ long commodity+ short futures contract –> CF evens out at T=0
At T=t, pay back borrowed money w/ interest + St + futures payoff which is Ft - St
and it works for question 1 (c).
However, for question 2 (a), the answer says I SHOULD NOT borrow money to fund for going long on widgets at T=0. Do you guys have any idea when NOT to borrow in the first place and why?
Thanks
 
Not seeing where you are that they are not borrowing at time = 0
they are buying the December Forward and at T=0 they are doing a -3.00 …
 
Please compare that question to question 1, where at T=0 the money to purchase the current forward (spot) is borrowed and the net cash flow evened out.
For question 2, like you said, the net cash flow is -3.00.
Do you know why?
 
they are buying the dec 2004 Spot price widget in 2. so -3.00
They are doing pretty much the same buying gold at Spot -300 at T=0 in q 1B).
 
The point is..
For Q1, yes, so the money-in and money-out cancel each other; the net CF is zero.
For Q2, no, widgets are not purchased with borrowed money; the net CF is -3.00
Is there a reason why the widgets are purchased without borrowing?
 
does anyone know whether this topic has appeared on the exam?…i have nt had the chance to do any past papers yet
thx
 
I’m stuck w this too, where did they get money to pay for the widget ?
 
I thought of it and it seems that if you are doing arbitrage, you borrow. Otherwise it is transaction between the producer and speculator without borrowing.
 
Ponky wrote:
I’m stuck w this too, where did they get money to pay for the widget ?
Click to expand...
point of cash and carry is to borrow the funds and arbitrage by selling the same commodity through the futures.
you borrow the cash and carry it forward to a future point in time, locking in the price through a futures contract (hedge).
and obviously reverse cash and carry is the inverse…. short the cash market, long the futures
 
The lesson I learned from EOC in this chapter.
  1. Both are C&C arbitrage related questions.
  2. Return could be in $ and %. (Similar to Value-added Return or Separation of long/short positions in SS17?)
  3. If it’s arbitrage free, the return in $ is zero. O/w, use C&C or reverse C&C to lock the profit.
  4. F0 = S0*e^(Rf - lease rate) , when the future price is too high, C&C – “borrow, buy&carry, and short future”.
  5. Use a table to present the cash flows by Time and Step.
 
Why is there no cash floW When forward is shorted?
Probably a level I question..
I guess d’cos shorting a
forward is selling & the
cash will be realized
at the future date
 
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