The cash-and-carry trade is an
arbitrage strategy of purchasing one security while simultaneously selling a similar security. This trade is typically employed by taking a
long and
short position strategy, in which the long cash position is taken with a short position, like the sale of a
futures contract. This strategy is most effective when the cost of purchasing the security plus the
cost of carry are less than the returns on the sale of a similar security, usually futures contract. The strategy, also known as "basis trading," can profit this way when the trader believes the securities are mispriced in a way that can produce a profit by employing the cash-and-carry trade.
(For more on cash and carry trading, read
Get Positive Results With Negative Basis Trading.)
