A:

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.)



RELATED FAQS
  1. If a person's account is frozen, which of the following activities is allowed ... ...

    The correct answer is a A frozen account does not mean that the person can not trade, it means that transactions must be ... Read Answer >>
  2. What is the difference between arbitrage and speculation?

    Arbitrage and speculation are very different strategies. Arbitrage involves the simultaneous buying and selling of an asset ... Read Answer >>
  3. What's the difference between a long and short position in the market?

    Understand long and short positions for stocks and option contracts; combine long and short positions for added leverage ... Read Answer >>
  4. How do I use the news to find arbitrage opportunities?

    Learn what risk arbitrage trading is and how this type of arbitrage trading opportunity is available to individual retail ... Read Answer >>
  5. How can a futures trader exit a position prior to expiration?

    A futures contract is an agreement to buy or sell a commodity at a pre-determined price and quantity at a future date in ... Read Answer >>
  6. How do I use software to make arbitrage trades?

    Understand the meaning of arbitrage trading, and learn how traders employ software programs to detect arbitrage trade opportunities. Read Answer >>
Related Articles
  1. Investing

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  2. Trading

    Trading The Odds With Arbitrage

    Profiting from arbitrage is not only for market makers - retail traders can find opportunity in risk arbitrage.
  3. Investing

    How To Arbitrage Precious Metals

    Here are the fine points, trading tips, suitable securities, and examples for precious metal arbitrage trading.
  4. Trading

    Covered Interest Arbitrage

    Covered interest arbitrage is a trading strategy in which an investor uses a forward currency contract to hedge against exchange rate risk.
  5. Investing

    Arbitrage Squeezes Profit From Market Inefficiency

    This influential strategy capitalizes on the relationship between price and liquidity.
  6. Investing

    Hedge Funds Hunt For Upside, Regardless Of The Market

    Hedge funds seek positive absolute returns, and engage in aggressive strategies to make this happen.
  7. Trading

    4 Common Active Trading Strategies

    Learn four of the most popular active trading strategies and why active trading isn't limited to professional traders anymore.
  8. Investing

    How ETF Arbitrage Works

    ETF arbitrage brings the market price of ETFs back in line with net asset values when divergence happens. But how does ETF arbitrage work?
  9. Trading

    Make Money Through Risk Arbitrage Trading

    Risk arbitrage provides a valuable trading strategy for M&A or other corporate actions eligible stocks. Investopedia explains how it works.
RELATED TERMS
  1. Cash-And-Carry Trade

    A trading strategy in which an investor buys a long position ...
  2. Reverse Cash-and-Carry-Arbitrage

    A combination of a short position in an asset such as a stock ...
  3. Arbitrage-Free Valuation

    1. The theoretical future price of a security or commodity based ...
  4. Basis Trading

    An arbitrage trading strategy that aims to profit from perceived ...
  5. Cash-And-Carry-Arbitrage

    A combination of a long position in an asset such as a stock ...
  6. Intermarket Spread

    The simultaneous purchase of a given delivery month of a futures ...
Hot Definitions
  1. Trumponomics

    Trumponomics is a term for the economic policies of President Donald Trump.
  2. Universal Health Care Coverage

    An organized healthcare system that provides healthcare benefits to all persons in a specified region. Many countries, such ...
  3. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
  4. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
  5. Efficient Frontier

    A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a ...
  6. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
Trading Center