If the Implied Repo Rate Is Lower Than the Borrowing $R_b$

question 9

Multiple Choice

If the implied repo rate is lower than the borrowing rate $R_b$ and the lending rate $R_{\ell}$ for the same maturity,what strategy would you adopt to undertake an arbitrage?

• A)Buy the asset spot,sell it forward,lend at rate \(R_{\ell}\)
• B)Buy the asset spot,sell it forward,borrow at rate \(R_b \)
• C)Sell the asset spot,buy it forward,lend at rate \(R_{\ell}\)
• D)Sell the asset spot,buy it forward,borrow at rate \(R_b \)

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Definitions:

Straight-Line Method

A method of calculating depreciation of an asset which assumes the asset will lose an equal amount of value each year over its useful life.

Diminishing Value

A method of depreciation where an asset loses value at a decreasing rate over time, reflecting its declining usefulness or productivity.

Accounting Rate of Return

A financial ratio that measures the return on investment from a project based on its net income.

Time Value of Money

The concept that money available today is worth more than the same amount in the future due to its earning capacity.