Cash-And-Carry Trade

What is a 'Cash-And-Carry Trade'

A trading strategy in which an investor holds a long position in a security or commodity while simultaneously holding a short position in a futures contract on the same security or commodity. In a cash-and-carry trade, the security is held until the contract delivery date, and is used to cover the short position’s obligation.

BREAKING DOWN 'Cash-And-Carry Trade'

By selling a futures contract, the investor has taken a short position, and knows how much will be made on the delivery date and the cost of the security because of the cash-and-carry trade’s long position component. For example, in the case of a bond, the investor receives the coupon payments from the long position plus any investment income earned by investing the coupons, as well as the pre-determined future price at the future delivery date.

Investors use this strategy when the cost of buying a security or commodity today is less than how much the security or commodity can be sold for in the future. The general strategy when seeking to gain arbitrage profits through a cash-and-carry trade has several steps. The investor must first purchase a security or commodity. He or she then sells a futures contract for the security or commodity, and then carries that security or commodity until it expires. Upon expiration, the investor delivers the commodity or security.

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RELATED FAQS
  1. How do I employ a cash-and-carry trade?

    The cash-and-carry trade is an arbitrage strategy of purchasing one security while simultaneously selling a similar security. ... Read Answer >>
  2. Which of the following would be considered a short hedge ...

    The correct answer is a) Long the commodity and short the futures Read Answer >>
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    Commodities are extremely important as they are essential factors in the production of other goods. A wide of array of commodities ... Read Answer >>
  4. How are commodity spot prices different than futures prices?

    Find out more about commodity spot and futures prices, how to calculate a commodity's futures price, and the differences ... Read Answer >>
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