Cash-And-Carry Trade


DEFINITION of '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 futures contract until it expires. Upon expiration, the investor delivers the commodity or security.

  1. Reverse Cash-and-Carry-Arbitrage

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

    The strategy of matching a long position with a short position ...
  3. Pairing Off

    An illegal practice of a brokerage firm offsetting short and ...
  4. Futures

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

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

    The simultaneous purchase and sale of an asset in order to profit ...
Related Articles
  1. Options & Futures

    Trading The Odds With Arbitrage

    Profiting from arbitrage is not only for market makers - retail traders can find opportunity in risk arbitrage.
  2. Options & Futures

    The Secret To Finding Profit In Pairs Trading

    Read about a market-neutral trading strategy using relatively low-risk positions.
  3. Investing

    In Search of the Rate-Proof Portfolio

    After October’s better-than-expected employment report, a December Federal Reserve (Fed) liftoff is looking more likely than it was earlier this fall.
  4. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  5. Investing

    Where the Price is Right for Dividends

    There are two broad schools of thought for equity income investing: The first pays the highest dividend yields and the second focuses on healthy yields.
  6. Professionals

    Top 3 Misconceptions About Financial Analysts

    Learn misconceptions about financial analysts, such as they exclusively study the stock market, they are the same as financial advisors and they are all rich.
  7. Options & Futures

    Terrorism's Effects on Wall Street

    Terrorist activity tends to have a negative impact on the markets, but just how much? Find out how to take cover.
  8. Investing Basics

    What is Equity?

    Think of equity as ownership in any asset after all debts stemming from that asset are paid.
  9. Investing Basics

    Explaining the Liquidity Preference Theory

    According to the liquidity preference theory, investors demand interest in return for sacrificing their liquidity.
  10. Investing Basics

    The Dangers Of Share Dilution

    Share dilution reduces the value of an individual investment and can drastically impact a portfolio.
  1. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  2. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  3. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
  4. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
  5. How does the stock market react to changes in the Federal Funds Rate?

    The stock market reacts to changes in the federal funds rate in various ways depending on where it is in the business cycle. ... Read Full Answer >>
  6. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center