Cash-And-Carry-Arbitrage

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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.

INVESTOPEDIA EXPLAINS '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.

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  3. Arbitrage

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RELATED FAQS
  1. What is arbitrage?

    Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference. ... Read Full Answer >>
  2. How are commodity spot prices different than futures prices?

    Commodity spot prices and futures prices are different quotes for different types of contracts. The spot price is the current ... Read Full Answer >>
  3. How do commodity spot prices indicate future price movements?

    Commodity spot prices indicate future price movements because commodity futures prices are calculated using spot prices. ... Read Full Answer >>
  4. Where did market to market (MTM) accounting come from?

    Mark to market accounting has been around in concept since the stock market began; however, it was not officially part of ... Read Full Answer >>
  5. Why is market to market (MTM) accounting considered controversial?

    Mark to market accounting has been an integral component of generally accepted accounting principles (GAAP) in the United ... Read Full Answer >>
  6. What is the difference between economic value and market value?

    The difference between market value and economic value is that the former represents the minimum amount the customer is willing ... Read Full Answer >>
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