arbitrage - forwards

rohitdoshi

Hi Brave Ones,

Just a simple thought that is challenging me:

Why in some forward-arbitrage exercises we "implicitly" have the money to invest and buy currency (CFAI Vol 6 p.54 exerc.12) and in other ones we have to borrow money to invest in a security (CFAI Vol 6 p.51 exerc. 5 A).

In the former exercise if we did not have the money to buy currency at spot it would make all the difference regarding the exploitation of this arbitrage opportunity...

How can I know when to assume that, for instance in a currency forward, that I have the money to make the initial outlay without the need of borrowing?


I hope you can help...I tried my best explaining this "little" confusion...


all the best for you all,

tigas

Pegasus2008

tigas Wrote:
-------------------------------------------------------
>
> How can I know when to assume that, for instance
> in a currency forward, that I have the money to
> make the initial outlay without the need of
> borrowing?
>


you will always have to borrow, unless the arbitrage strategy involves selling the security at spot - in which case the gains from the sale will be invested at the risk free rate.