Reverse Cash and Carry Arbitrage

Yep - Since monday (and im studying at work so imagine the hours) I have been reviewing 2008 AM. Hopefully I get this done today so I can review my afternoon section before caturday meooowwww.
 
only good thing is 08, the morning scores were pretty universally bad right?
i’m taking 08 next weekend, so saving the hardest for last. 06 and 07 go first.
 
I remember a reverse cash and carry problem on the AM last year (I guess I can talk about it without getting into trouble because CFAI posted the exam and answers anyway). It was the last danged problem in the AM. Problem number ELEVEN (yes, some people were so used to having 10 problems in the AM, that they didn’t even bother to check if there was an 11th problem - they thought they were done at #10).
Cash-and-cary problems are really pretty straightforward. They all follow the same format: you do something (buy or sell) with the forward, do the reverse transaction with the spot (sell or buy), and either borrow or lend money, depending on whether you are buying the spot (and borrow money for it) or selling spot (and investing the proceeds).
The problem was, after 3 hours of doing IPS and other stuff in the AM, my brain was too frazzled to remember which one was cash-and-carry and which one was reverse-cash-and-carry. They asked for reverse cash-and-carry and I didn’t know which direction was which. So I just answered it for the direction that would make money and prayed that that was the one they wanted. IIRC they asked to do the reverse cash-and-carry and say whether there was a profit or loss and how much it was.
I thought it was a pretty cheap shot to ask a worn out guy at the end to remember which direction was regular and which one was reverse. As long as you know which way makes money, that should be enough.
 
CFAI didn’t post the afternoon questions, did they? I’m running out of mutiple guess questions to try.
 
Spot markets = cash markets
Therefore, cash and carry is buy in the spot market an carry until the future sale in the future.
That is how I remember it.
 
Yeah, that makes sense. Or remember that you carry the underlying in your portfolio until the future is due.
 
bchadwick Wrote:
——————————————————-
> I remember a reverse cash and carry problem on the
> AM last year (I guess I can talk about it without
> getting into trouble because CFAI posted the exam
> and answers anyway). It was the last danged
> problem in the AM. Problem number ELEVEN (yes,
> some people were so used to having 10 problems in
> the AM, that they didn’t even bother to check if
> there was an 11th problem - they thought they were
> done at #10).
>
> Cash-and-cary problems are really pretty
> straightforward. They all follow the same format:
> you do something (buy or sell) with the forward,
> do the reverse transaction with the spot (sell or
> buy), and either borrow or lend money, depending
> on whether you are buying the spot (and borrow
> money for it) or selling spot (and investing the
> proceeds).
>
> The problem was, after 3 hours of doing IPS and
> other stuff in the AM, my brain was too frazzled
> to remember which one was cash-and-carry and which
> one was reverse-cash-and-carry. They asked for
> reverse cash-and-carry and I didn’t know which
> direction was which. So I just answered it for
> the direction that would make money and prayed
> that that was the one they wanted. IIRC they
> asked to do the reverse cash-and-carry and say
> whether there was a profit or loss and how much it
> was.
>
> I thought it was a pretty cheap shot to ask a worn
> out guy at the end to remember which direction was
> regular and which one was reverse. As long as you
> know which way makes money, that should be enough.
Hey, I finally get to correct bchadwick on something!
The reverse cash and carry wasn’t the last question in the 2008 AM. It was #6. #11 was that awful question with billions of yen currency futures, the one I skipped.
It’s been a while, but I kept the two directions straight by thinking of “cash and carry” as meaning you get cash by borrowing. I hope that’s right.
Anyway, the 2008 question was complicated by the fact that it also involved leasing of copper and convenience yield discussions, etc.
 
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