What is 'Cash-And-Carry-Arbitrage'

Cash-and-carry-arbitrage is 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.

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

    A combination of a short position in an asset such as a stock ...
  2. Futures

    A financial contract obligating the buyer to purchase an asset ...
  3. Carrying Charge

    Cost associated with storing a physical commodity or holding ...
  4. Wide Basis

    A condition found in futures markets in which the spot price ...
  5. Cash and Carry Transaction

    A type of transaction in the futures market in which the cash ...
  6. Short The Basis

    A futures strategy involving the purchase of a futures position ...
Related Articles
  1. Trading

    Why Is Arbitrage Trading Legal?

    Not only is arbitrage legal in the US and most developed countries, it can be beneficial to the overall health of a market.
  2. 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.
  3. Trading

    The Difference Between Forwards and Futures

    Both forward and futures contracts allow investors to buy or sell an asset at a specific time and price.
  4. Trading

    Advantages Of Trading Futures Over Stocks (APPL)

    We look at the top eight advantages of trading futures over stocks.
  5. Investing

    What's The Difference Between Options And Futures?

    An option gives the buyer the right, but not the obligation, to buy or sell a certain asset at a set price during the life of the contract. A futures contract gives the buyer the obligation to ...
  6. Investing

    How To Arbitrage Precious Metals

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

    Introduction To Currency Futures

    The forex market is not the only way for investors and traders to participate in foreign exchange.
  8. Trading

    Using Index Futures To Predict The Future

    Want to know whether the stock market will open up or down? Check out the index futures.
RELATED FAQS
  1. Why do futures' prices converge upon spot prices during the delivery month?

    It's a fairly safe bet that as the delivery month of a futures contract approaches, the future's price will generally inch ... 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. How can I calculate the notional value of a futures contract?

    Learn how the notional value of a futures contract is calculated, and how futures are different from stock since they have ... Read Answer >>
  4. What types of items can you buy futures for?

    Learn what items futures may be purchased for, what a futures contract is and discover how the futures markets have greatly ... 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 the investment risks differ between options and futures?

    Learn what differences exist between futures and options contracts and how each can be used to hedge against investment risk ... Read Answer >>
Hot Definitions
  1. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  2. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  3. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  4. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  5. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  6. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
Trading Center