silly reverse cash and carry Q

question, position, material, contract, only

this is silly because this is not the first time i am reading this material, however, only now has this question been raised in my head!

in the chapter on commodity fwds, in a reverse cash and carry arbitrage, if we take a long position in a fwd contract @ $0.20, why is our cash flow in Yr 1 = $0.20-F(0,1)?? Arent we supposed to be paying $0.20 at yr 1 ??

please tell me its a stupid question else i will wonder how i never picked this up last yr.....

justin88

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2^#

发表于 2011-7-13 16:58 | 只看该作者

I also found it silly initially but then looked again after you posted. What this is saying is if you short forward transaction, at year 1 = $.20 - F(0,1), means you are paying F(0,1) and receiving the collateral worth at sport which is $.20. So the equation is good when the forward price is not equal to $.20. So in this case its $.20 - $.20.

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cityboy

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发表于 2011-7-13 16:58 | 只看该作者

if we short the forward, we will be receiving F(0,1) and not paying...

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ohai

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发表于 2011-7-13 16:58 | 只看该作者

why did the long position in the first post become a short position on the 2nd post?

if you took a long position you bought the underlying. Now 1 year later - you sell it at the forward price and receive F(0,1).

So if you paid 0.20 - your cash flow is 0.20 - F(0,1) - a net outflow.

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