What Is a Reverse Cash-and-Carry Arbitrage?

Reverse cash-and-carry arbitrage is a market-neutral strategy combining a 澳洲幸运5官方开奖结果体彩网:short position in an asset and a long futures position in that same asset. Its goal is to exploit pricing inefficiencies between that asset's cash, or spot, price and the corresponding future's price to generate r꧟iskless profits.

Understanding Reverse Cash-and-Carry Arbitrage

As its name suggests, reverse cash-and-carry arbitrage is the mirror image of a regular 澳洲幸运5官方开奖结果体彩网:cash-and-carry arbitrage. In the latter, the 澳洲幸运5官方开奖结果体彩网:arbitrageur carries the asset until the 澳洲幸运5官方开奖结果体彩网:expiration date of the futures contract, at which point the asset will be delꦍivered against the futures contract.

For a reverse cash-and-carry arbitrage, the arbitrageur holds a short position in the asset, commonly a stock or 澳洲幸运5官方开奖结果体彩网:commodity, and a long position in that asset's 澳洲幸运5官方开奖结果体彩网:futures contract.

At maturity, the arbitrageur 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 lower than the 澳洲幸运5官方开奖结果体彩网:spot price of the asset. That is, the proceeds from the short sa𒅌le should exceed the price of the futures contract and the costs associated w🐬ith carrying the short position in the asset.

A reverse cash-and-carry arbitrage strategy is only worthwhile if the futures price is cheap relative to the spot price of the asset. This is a condition known as 澳洲幸运5官方开奖结果体彩网:backwardation, where futures contracts with later expiration dates, also known as 澳洲幸运5官方开奖结果体彩网:back month contracts, trade at a d𝓰iscount to the spot price. The arbitrageur is betting that this condition, which is abꦉnormal, will revert back to form, thus creating the environment for a riskless profit.

Example of Cash-and-Carry Arbitrage

Consider the following example of a 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 澳洲幸运5官方开奖结果体彩网:carrying costs on the short position (for example, 澳洲幸运5官方开奖结果体彩网:dividends are payable by the short seller) amount to $2. In this case, the 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 ($104 - $100 - $2).

The term riskless is not completely accurate as risk still exists, such as an increase in carrying costs, or the brokerage firm 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 next step is the delivery of the asset against the futures contract. There is no need to access either side of the trade in the 澳洲幸运5官方开奖结果体彩网:open market at expiration.