Skip to learning content

IBBC CAPITAL ACADEMY / 2027

Replication and financing carry

Independent IBBC Capital draft content for self-study. Not affiliated with or endorsed by CFA Institute. New lessons await subject-matter review. No CFA designation or official PSM credit is awarded.

Learning goals

  • Explain no-arbitrage logic using mechanisms and limitations.
  • Explain carry components using mechanisms and limitations.
  • Explain limits in practice using mechanisms and limitations.

Draft · approximately 25 minutes, excluding further revision.

No-arbitrage logic

Two portfolios with identical future cash flows and matching risk should have equal value under frictionless no-arbitrage assumptions; compare the whole cash-flow schedule.

Cash-and-carry buys the asset with financing and sells forward; reverse carry reverses the positions, subject to borrowing and short-sale feasibility.

Carry components

For an investment asset without income or storage cost, a one-period forward delivery price equals spot grown at the compatible financing rate.

Income reduces carrying cost while storage expense increases it; convenience yield is an ownership benefit that can lower commodity forwards relative to pure financing carry.

Limits in practice

A forward price is constrained by replication and carry, whereas expected future spot reflects uncertain beliefs and risk premia; they need not be equal.

Bid–ask spreads, funding differences, taxes and short-sale limits can create arbitrage bands rather than one executable textbook price.

Formula and assumptions

F0(T)=S0(1+r)^T for a no-income asset under stated assumptions

Original applied case: Replication and financing carry

  1. A non-income asset costs 100, one-year borrowing/lending rate 5%, with no frictions.
  2. Replicating one-year delivery costs 100×1.05=105.
  3. A higher executable forward could support cash-and-carry only if all financing and trading assumptions hold.

Errors to catch

  • Do not assume: Identical future payoffs must always have unrelated prices.
  • Do not assume: Reverse carry never requires asset borrowing.
  • Do not assume: Financing carry lowers every no-income forward below spot.

Original knowledge check

Answer every question before checking. Review explanations after submitting; retry starts a new attempt.

Sources and coverage status

These original lessons are drafts. Public outlines are used to check scope; the official learning-outcome text and proprietary question banks are not reproduced here. Follow the source for exam-year requirements and updates.