DEFINITION of 'Cash-And-Carry-Arbitrage'

A combination of a long position in an asset such as a stock or commodity, and a short position in the underlying futures. This arbitrage strategy seeks to exploit pricing inefficiencies for the same asset in the cash (or spot) and futures markets, in order to make riskless profits. The arbitrageur would typically seek to "carry" the asset until the expiration date of the futures contract, at which point it would be delivered against the futures contract. Therefore, this strategy is only viable if the cash inflow from the short futures position exceeds the acquisition cost and carrying costs on the long asset position.

BREAKING DOWN 'Cash-And-Carry-Arbitrage'

Consider the following example of cash-and-carry-arbitrage. Assume an asset currently trades at $100, while the one-month futures contract is priced at $104. In addition, monthly carrying costs such as storage, insurance and financing costs for this asset amount to $3. In this case, the trader or arbitrageur would buy the asset (or open a long position in it) at $100, and simultaneously sell the one-month futures contract (i.e. initiate a short position in it) at $104. The trader would then carry the asset until the expiration date of the futures contract, and deliver it against the contract, thereby ensuring an arbitrage or riskless profit of $1.

  1. Reverse Cash-and-Carry-Arbitrage

    A combination of a short position in an asset such as a stock ...
  2. Short (or Short Position)

    A short position is the sale of a borrowed security, commodity ...
  3. Futures

    A financial contract obligating the buyer to purchase an asset ...
  4. Cost Of Carry

    Costs incurred as a result of an investment position. These costs ...
  5. Arbitrage

    The simultaneous purchase and sale of an asset in order to profit ...
  6. Positive Carry

    A strategy of holding two offsetting positions, one of which ...
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  1. What is arbitrage?

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  3. Can mutual funds invest in options and futures?

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  4. How do futures contracts roll over?

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  5. Is there a difference between financial spread betting and arbitrage?

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