What is Cash-and-Carry-Arbitrage

Cash-and-carry-arbitrage is a market-neutral strategy combining the purchase of a long position in an asset such as a stock or commodity, and the sale (short) of a position in a futures contract on that same underlying asset. It seeks to exploit pricing inefficiencies for the asset in the cash (or spot) market and 澳洲幸运5官方开奖结果体彩网:futures market, in order to make riskless profits. The𓃲 futures contract must be theoreticall🌳y expensive relative to the underlying asset or the arbitrage will not be profitable.

Basics of Cash-and-Carry-Arbitrage

In a cash-and-carry-arbitrage, the 澳洲幸运5官方开奖结果体彩网:arbitrageur would typically seek to "carry" the asset until the expiration date of the futures contract, at which point it would be delivered against the futures contract. Therefore, this strategy is only viable if the cash inflow from the short futures position exceeds the 澳洲幸运5官方开奖结果体彩网:acquisition cost and 澳洲幸运5官方开奖结果体彩网:carrying costs on the long asset position.

澳洲幸运5官方开奖结果体彩网:Cash-and-carry arbitrage positions are not 100% without risk as there is still risk the carrying costs can increase, such as a brokerage raising its margin rates. However, the risk of any market movement, which is the major component in any regular long or short trade, is mitigated by the fact that once the trade is set in motion, the only event is the delivery of the asset against the futures contract. There is no need to access either one in the 澳洲幸运5官方开奖结果体彩网:open market at expiration.

Physical assets such as barrels of oil or tons of grain require storage and insurance, but stock indexes, such as the S&P 500 Index, likely require only financing costs, such as margin. Therefore, arbitrage may be more profitable, all else held constant, in these non-physical markets. However, because the barriers to participate in arbitrage are much lower, they allow more players to attempt such a trade. The result is more efficient pricing between spot and futures markets and lower spreads between th🔥e two. Lower spreads mean lower opportunities to profit.

Less active markets may still have 澳洲幸运5官方开奖结果体彩网:arbitrage possibilities, as long as there is a𒐪dequate liquidity on both sides of the game—spot and fu🐬tures.

Example of Cash-and-Carry Arbitrage

Consider the following example of cash-and-carry-arbitrage. Assume an asset currently trades at $100, while the one-month 澳洲幸运5官方开奖结果体彩网:futures contract is priced at $104. In addition, monthly carrying costs such as storage, insurance, and financing costs for this asꦿset amount to $3.

In this case, the arbitrageur would buy the asset (or open a long position in it) at $100 and simultaneously sell the one-month futures contract (i.e. initiate a short position in it) at $104. The trader would then hold or carry the asset until the 澳洲幸运5官方开奖结果体彩网:expiration date of the futures contract and deliver th꧟e a💧sset against the contract, thereby ensuring an arbitrage or riskless profit of $1.