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.

RELATED TERMS
  1. Reverse Cash-and-Carry-Arbitrage

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  2. Short (or Short Position)

    1. The sale of a borrowed security, commodity or currency with ...
  3. Positive Carry

    A strategy of holding two offsetting positions, one of which ...
  4. Arbitrage

    The simultaneous purchase and sale of an asset in order to profit ...
  5. Cost Of Carry

    Costs incurred as a result of an investment position. These costs ...
  6. Futures

    A financial contract obligating the buyer to purchase an asset ...
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 do I convert a spot rate to a forward rate?

    Think of the relationship between spot and forward rates in the same way as the relationship between discounted present value ... Read Full Answer >>
  3. How accurate is the forward rate in predicting interest rates?

    Forward rates are extremely limited predictors of actual interest rates. This isn't particularly surprising, given the multitude ... Read Full Answer >>
  4. What is the difference between a forward rate and a spot rate?

    The forward rate and spot rate are different prices, or quotes, for different contracts. The forward rate is the settlement ... Read Full Answer >>
  5. How can an investor make money from a decline in the electronics sector?

    Speculation methods, such as short selling, futures contracts and put options, offer investors a way to make money from a ... Read Full Answer >>
  6. How can an investor profit from a decline in the aerospace sector?

    Several forms of speculation enable investors to profit from a decline in the aerospace sector. Short selling aerospace stock ... Read Full Answer >>
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