Reverse Cash-and-Carry

[archived_user]

I noticed the “reverse cash-and-carry stategy” in the 2008 AM mock. This question totally threw me for a loop. Can anyone walk me through the basics of this strategy? Thanks in advance.

 

[archived_user]

If the forward price on an asset is too low, (less than the spot price increased at the risk-free rate), then you want to buy the asset in the forward market (buy cheap) and sell it in the spot market (sell dear) to make an arbitrage profit:

1. Sell the asset short in the spot market
2. Invest the proceeds of the short sale at the risk-free rate
3. Take the long position in a forward contract on the asset (at the too-low price)
4. Wait, patiently
5. Take the proceeds from the investment, pay off the long forward position, and take delivery of the asset
6. Deliver the asset against the short sale
7. Wallow in the profits

 

[archived_user]

^bump

 

[archived_user]

It’s not in 2015 curriculum.

 

[archived_user]

S2000 - Thank you, well explained
June06 - Thank you

 

[archived_user]

My pleasure.