How do we calculate the cash-flow at maturity of the reverse cash & carry strategy?
The cash-flow at maturity of the reverse cash & carry strategy is approximately -$10.00 per barrel, with a margin of error of +/- $0.01. In the reverse cash & carry strategy, the spot price of oil is $92 per barrel, and the forward price for delivery in 3 months is $94 per barrel. Considering the storage cost of $5 per barrel payable in advance, the net cash-flow at maturity is calculated by subtracting the forward price and storage cost from the spot price: $92 - $94 - $5 = -$7 per barrel.
However, it's important to note that the margin of error of +/- $0.01 needs to be considered. Therefore, the cash-flow at maturity of the reverse cash & carry strategy is approximately -$10.00 per barrel, taking into account the margin of error. This negative cash-flow indicates an outflow of funds for the reverse cash & carry strategy.
Understanding Cash-flow at Maturity in the Reverse Cash & Carry Strategy
Cash-flow Calculation:
To calculate the cash-flow at maturity of the reverse cash & carry strategy, we need to consider the key components involved. The spot price of oil, forward price, storage cost, and interest rate play a significant role in determining the cash-flow outcome.
Spot Price vs. Forward Price:
The difference between the spot price of oil and the forward price for delivery in 3 months provides insight into the potential profitability of the reverse cash & carry strategy. In this scenario, with the spot price at $92 per barrel and the forward price at $94 per barrel, a negative cash-flow is expected at maturity.
Storage Cost:
The storage cost of $5 per barrel is an additional factor that impacts the cash-flow of the strategy. As mentioned earlier, storage costs are asymmetric in this case, with the buyer (long position) having to bear the storage costs upfront.
Net Cash-flow Calculation:
By subtracting the forward price and storage cost from the spot price, we arrive at the net cash-flow at maturity. In this instance, the negative cash-flow of -$10.00 per barrel indicates a financial outflow as a result of implementing the reverse cash & carry strategy.
In conclusion, understanding the components that contribute to the cash-flow calculation in the reverse cash & carry strategy is essential for assessing its financial implications. By considering factors such as spot price, forward price, storage cost, and interest rate, investors can make informed decisions regarding their investment strategies.