Cash and carry trade

CFA Level I
#1
  1. Which of the following strategies is an effective cash and carry trade, if currently the underlying asset is trading at $100, and one-year futures contract is priced at $102, and the annual carrying cost is $1.
    A. Borrow money and pay interest, at the same time long the asset, short the futures contract
    B. Sell asset and long futures contract, lend the money to investors, and earn the carrying cost
    C. Borrow money and pay interest, at the same time, short asset, and long futures contract
    D. Sell futures contract and long asset, lend the money to investors, and earn the carrying cost

Should it be A or D? I think D in the way we are selling the futures.

Old kaplan 2009 question bank

#2

anyone? :slight_smile:

#3

In (D), where would you get the money to (a) lend to investors and (b) buy the asset?

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#4

They don’t specify that. But I guess it has to be D because the effective cash and carry trade is to sell futures.

#5

think about the cash flows.
(A). Borrow money and pay interest, at the same time long the asset, short the futures contract

Now:
You borrow $100, use that $100 to buy the asset.
You sell the futures contract, which doesn’t involve any cash flow until next year.

One year from now:
Deliver the stock on the futures contract and receive $102.
Repay the loan ($101 = $100 + $1 interest).
That leaves $1 profit.

You need to borrow the money to buy the stock.

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