CASH-AND-CARRY ARBITRAGE
Back to GlossaryDefinition
A strategy that exploits pricing differences between spot and futures by buying the asset and selling the futures, holding until convergence.
Summary
Cash-and-carry arbitrage is a risk-free trading strategy used in derivatives markets where an investor simultaneously buys an underlying asset (like a stock or commodity) in the spot market and sells a futures contract on that same asset. The investor then 'carries' the asset until the futures contract expires, at which point the spot and futures prices converge. This strategy profits from temporary pricing inefficiencies when the futures price is higher than the spot price plus carrying costs (storage, insurance, financing costs). It's called 'arbitrage' because it theoretically generates risk-free profit by exploiting price differences between related markets.
Usage Context
Essential for understanding derivatives pricing, market efficiency concepts, and how arbitrage opportunities are eliminated in efficient markets. Important when studying futures valuation models and the relationship between spot and derivatives prices.
Common Confusions
- Thinking it works when futures prices are below spot prices (that's reverse cash-and-carry)
- Forgetting to include all carrying costs in profit calculations
- Assuming it's completely risk-free when practical risks like liquidity and execution exist
- Confusing the direction of the trade (buy spot, sell futures)
- Not understanding why prices must converge at expiration
