Reverse Cash-and-Carry-Arbitrage

Definition of 'Reverse Cash-and-Carry-Arbitrage'


A combination of a short position in an asset such as a stock or commodity, and a long position in the futures for that asset. Reverse cash-and-carry arbitrage 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 or trader accepts delivery of the asset against the futures contract, which is used to cover the short position. This strategy is only viable if the futures price is cheap in relation to the spot price of the asset. That is, the proceeds from the short sale should exceed the price of the futures contract and the costs associated with carrying the short position in the asset.

Investopedia explains 'Reverse Cash-and-Carry-Arbitrage'


This strategy is only viable if the futures price is cheap in relation to the spot price of the asset. That is, the proceeds from the short sale should exceed the price of the futures contract and the costs associated with carrying the short position in the asset.

Consider the following example of reverse cash-and-carry-arbitrage. Assume an asset currently trades at $104, while the one-month futures contract is priced at $100. In addition, monthly carrying costs on the short position (for example, dividends are payable by the short seller) amount to $2. In this case, the trader or arbitrageur would initiate a short position in the asset at $104, and simultaneously buy the one-month futures contract at $100. Upon maturity of the futures contract, the trader accepts delivery of the asset and uses it to cover the short position in the asset, thereby ensuring an arbitrage or riskless profit of $2.
 


Filed Under: , ,

comments powered by Disqus
Hot Definitions
  1. Cash and Carry Transaction

    A type of transaction in the futures market in which the cash or spot price of a commodity is below the futures contract price. Cash and carry transactions are considered arbitrage transactions.
  2. Amplitude

    The difference in price from the midpoint of a trough to the midpoint of a peak of a security. Amplitude is positive when calculating a bullish retracement (when calculating from trough to peak) and negative when calculating a bearish retracement (when calculating from peak to trough).
  3. Ascending Triangle

    A bullish chart pattern used in technical analysis that is easily recognizable by the distinct shape created by two trendlines. In an ascending triangle, one trendline is drawn horizontally at a level that has historically prevented the price from heading higher, while the second trendline connects a series of increasing troughs.
  4. National Best Bid and Offer - NBBO

    A term applying to the SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities.
  5. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account.
  6. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years.
Trading Center