Cash & Carry/Reverse Cash & Carry

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Hi guys,
Reading over question 6 in CFAI morning… I can’t fully get both the cash and carry and reverse cash and carry..
First off, how are the two trades done? Also, how do we go about calculating the profit/loss?
And this may be also important… Possibly 208 exam was more focused on this future trades than 2013? I don’t recall this being extensively mentioned in the readings this year.
 
This is Level II material.
Cash-and-carry: borrow money, buy in the spot market, short in the forward market, wait patiently, deliver on the forward, receive money, pay off loan, reap massive profits.
Reverse cash-and-carry: sell short in the spot market, lend the money, long in the forward market, wait patiently, get the payoff on the loan, take delivery on the forward, pay for delivery, cover short, reap massive profits.
 
I’ll summarize it for you:
First you look at spot and forward prices.
If forward < Spot , its more efficient for you to buy it later since later is cheaper, so you go long fwd on the fwd price, and you short sell at the spot price since its profitable for you to sell at higher price. Final step is, since you did not pay money now, you still have $$, so you can lend the money at the risk free rate and get the proceeds + the money you lend at T1.
Now if you have convenience yield, then you need to pay the conv yield at S x e power conv y x (n/12) - S .. since you did not buy it at time 0 and held it till time 1.
If spot < Fwd .. you just reverse whats done above since its cheaper for you to buy it now and go short fwd in the future since price is less and since you are buying it now, you need to borrow money to buy it.. i hope this helps .. once you get the logic you can apply the numbers.
 
Bilal wrote:
I’ll summarize it for you:
First you look at spot and forward prices.
If PV(forward) < Spot , its more efficient for you to buy it later since later is cheaper, so you go long fwd on the fwd price, and you short sell at the spot price since its profitable for you to sell at higher price. Final step is, since you did not pay money now, you still have $$, so you can lend the money at the risk free rate and get the proceeds + the money you lend at T1.
Now if you have convenience yield, then you need to pay the conv yield at S x e power conv y x (n/12) - S .. since you did not buy it at time 0 and held it till time 1.
If spot < PV(Fwd) .. you just reverse whats done above since its cheaper for you to buy it now and go short fwd in the future since price is less and since you are buying it now, you need to borrow money to buy it.. i hope this helps .. once you get the logic you can apply the numbers.
Click to expand...
Fixed those for you.
 
ha im glad if that’s the only mistake i got lol ! i just look at the spot and fwd prices given but anyhow thanks!! i fixed my notes =)
 
S2000 or bilal
Can you guys please go through a detailed example involving the convenience yield
 
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