Arbitrage, 麻油鸡& Acquisition

I love the way my Derivatives class is taught. Often in Singapore, we first learn the definition, then the formula, then we 'apply' to question. The way Prof Busaba teaches derivatives is to first help us get the intuition behind the instrument, then move on to a numerical example. From there, we generalize the case and arrive at the 'given formula'. A very refreshing way to learn new concepts.

He shared with us a fact that has been bugging arbitrageur and folks that support EMH - 1 year oil futures vs. spot oil price has HUGE spread that cannot be easily explained by pricing model.

FACTS: Spot price = 43.81, Futures (Mar 09) = 55.61

Given the figures, the implied cost of carry is about 23.8%. For oil, the cost of carry is basically cost of capital + storage cost. If cost of capital is 10% (hey, 30 risk-free rate is only abt 3%) and cost to store is about 5%, then there is a 8% spread that CANNOT be explained.

Can u imagine if we see an advertisement in Straits Times saying that in one year's time NTUC will be buying toilet paper from me at 55.61 if i enter into agreement with it. All i have to do is borrow 43.81 from my dad, buy the toilet paper, store at some dry basement...sell the toilet paper back to NTUC at 55.61, pay my dad some interest, and compensate whoever lent me their basement, and the rest of the money is mine to keep!

ie. Profit = Agreed selling price - cost price - interest - storage cost!!!

Haha. Any friends here that have low cost access to capital and also a HUGE basement to store barrels of oil ?!?!?! Call me :)

To the see the intraday futures prices, click here.

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Managed to cook 麻油鸡today, my most ambitious dish yet! Super proud of it given that it was my first attempt and the final product is quite edible. I couldn't find 米酒, so i used some super strong liquor i found in the cabinet. Haha. So my 麻油鸡 is super nice for the super cold weather.

The soup u see was prepared by my landlord. and the dumpling thing beside veg was bought from a neighbour that sells homemade food. Since it reminded me of 锅贴, i 'educated' my host that it SHOULD be taken with ginger and vinegar. Sadly there no 黑醋 around, so i used red wine vinegar. Taste great!

My latest acquisition is my HUMIDIFIER!!!

Now my room is Warm and Moist. Sounds a lot like the weather back home huh?

Haha. My summer palace in the winter wonderland!!!