Futures Investment Decision

CFA Level II Alternative Investments
#1

Not sure how to understand the answer to this question:

given: copper silver and molybdenum spot prices of (respectively)

G3.15

G12.75

G34.45

and futures prices of (respectively)

G3.54

G12.82

G35.23

the no-arb futures prices are (respectively)

G3.27

G13.23

G35.74

and the arb opportunity and transaction costs are (respectively)

G0.27

G0.41

G0.51

and

G0.11

G0.38

G1.06

Why is the answer to buy copper spot, sell spot silver and not trade Molybdenum? I get buy copper I think (shouldn’t price converge to higher no-arb futures price?) and I get not trading Molybdenum as the transaction cost > arb profit, however I dont get selling silver considering the spot is below no-arb futures price and the current future prices is undervalued…Shouldn’t we buy undervalued?

Long question, sorry, just don’t understand.

#2

To make money you buy cheap and sell dear.

Here, for silver, the quoted future price is below the no-arbitrage price, so you buy silver in the futures market and sell it in the spot market; it’s classic reverse cash-and-carry arbitrage.

#3

*doh* Ahh thanks so much for that.

Also your website, financialexamhelp123.com has been instrumental for my level 2 understanding, so thanks for that as well!

#4

My pleasure.

I’m glad to have been a help.