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.

BREAKING DOWN '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.

  1. Cash-And-Carry Trade

    A trading strategy in which an investor buys a long position ...
  2. Cash-And-Carry-Arbitrage

    A combination of a long position in an asset such as a stock ...
  3. Futures

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

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

    The simultaneous purchase and sale of an asset in order to profit ...
  6. Risk Arbitrage

    A broad definition for three types of arbitrage that contain ...
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  1. What is arbitrage?

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  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. How do futures contracts roll over?

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  4. Is there a difference between financial spread betting and arbitrage?

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  5. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  6. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>

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