Part 2 - Cost of carry/CIP/UIP

Question 1

rf + c − δ - what is this

Answer 1

Cost of carry equation -

Question 2

forward premium

Answer 2

a forward premium refers to the situation where the price of a forward or futures contract is higher than the current spot price of the underlying asset, indicating an expectation of the asset’s price increase over the contract’s term

Question 3

What is the cost/benefit of waiting to hold X - rf + c − δ?

Answer 3

While you wait, your cash earns rf
.
While you wait, you don’t have to pay c.
While you wait, you don’t receive δ.

Question 4

If you go long a synthetic forward.
Go short a forward. what is the result

Answer 4

Result is a cash and carry trade

Question 5

What is true if a stock has a positive cost of carry?

Answer 5

The dividend yield is lower than the risk-free rate.

Question 6

Why isn’t the carry trade arbitrage?

Answer 6

) It has negative cashflows in some states of the world.