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. 

Investopedia explains '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.

 



comments powered by Disqus
Hot Definitions
  1. Quanto Swap

    A swap with varying combinations of interest rate, currency and equity swap features, where payments are based on the movement of two different countries' interest rates. This is also referred to as a differential or "diff" swap.
  2. Genuine Progress Indicator - GPI

    A metric used to measure the economic growth of a country. It is often considered as a replacement to the more well known gross domestic product (GDP) economic indicator. The GPI indicator takes everything the GDP uses into account, but also adds other figures that represent the cost of the negative effects related to economic activity (such as the cost of crime, cost of ozone depletion and cost of resource depletion, among others).
  3. Accelerated Share Repurchase - ASR

    A specific method by which corporations can repurchase outstanding shares of their stock. The accelerated share repurchase (ASR) is usually accomplished by the corporation purchasing shares of its stock from an investment bank. The investment bank borrows the shares from clients or share lenders and sells them to the company.
  4. Microeconomic Pricing Model

    A model of the way prices are set within a market for a given good. According to this model, prices are set based on the balance of supply and demand in the market. In general, profit incentives are said to resemble an "invisible hand" that guides competing participants to an equilibrium price. The demand curve in this model is determined by consumers attempting to maximize their utility, given their budget.
  5. Centralized Market

    A financial market structure that consists of having all orders routed to one central exchange with no other competing market. The quoted prices of the various securities listed on the exchange represent the only price that is available to investors seeking to buy or sell the specific asset.
  6. Balanced Investment Strategy

    A portfolio allocation and management method aimed at balancing risk and return. Such portfolios are generally divided equally between equities and fixed-income securities.
Trading Center