5. (Carrying cost proof) Complete the second half of the proof of the forward price formula...

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5. (Carrying cost proof) Complete the second half of the proof of the "forward price formula with carying cost" in Section 10 3 To construct the arbitrage, go long one unit of a forward and short one unit spot To execute the short, it is necessary to borrow the asset from someone, say, Mr X As part of our arrangement with Mr. X we ask that he give us the carrying costs as they would normally occur, since he would have to pay them if we did not borrow the asset We then invest these cash flows At the final time we buy one unit as obligated by our forward and repay Mr. X Show the details of this argument 5. (Carrying cost proof) Complete the second half of the proof of the "forward price formula with carying cost" in Section 10 3 To construct the arbitrage, go long one unit of a forward and short one unit spot To execute the short, it is necessary to borrow the asset from someone, say, Mr X As part of our arrangement with Mr. X we ask that he give us the carrying costs as they would normally occur, since he would have to pay them if we did not borrow the asset We then invest these cash flows At the final time we buy one unit as obligated by our forward and repay Mr. X Show the details of this argument

Answer rating: 100% (QA)

We go long on the forward and short on the spot We borrow the asset from Mr X and ask for the carryi... View the full answer