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Understanding Arbitrage: An Intuitive Approach to Financial Analysis by Randall Billingsley

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Chapter 3. Cost of Carry Pricing

The price of an article is charged according to difference in location, time, or risk to which one is exposed in carrying it from one place to another or in causing it to be carried. Neither purchase nor sale according to this principle is unjust.

St.Thomas Aquinas c. 1264

This chapter extends the arbitrage framework by presenting the cost of carry model approach to identifying and exploiting mispriced positions. The model links two types of prices: spot prices, which are transactions today, and forward and futures prices, which are negotiated today but apply to future transactions. The framework powerfully yet simply reveals when spot and forward or futures prices incorrectly reflect the costs and benefits of ...

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