Cash-and-Carry-Arbitrage

Cash-and-carry arbitrage is a trading strategy that involves buying an asset in the spot market and simultaneously selling it in the futures market. The goal is to profit from the difference in prices between the two markets.

The difference in prices between the spot and futures markets is called the basis. The basis can be positive or negative. A positive basis means that the futures price is higher than the spot price. A negative basis means that the futures price is lower than the spot price.

Cash-and-carry arbitrage is only possible when the basis is positive. This is because when the basis is positive, the futures price is higher than the spot price. This means that it is possible to buy an asset in the spot market and sell it in the futures market for a profit.

The profit from cash-and-carry arbitrage is equal to the difference between the spot price and the futures price, plus the cost of carry. The cost of carry is the cost of holding the asset over the period of time between the spot and futures contracts. This cost includes storage costs, insurance costs, and interest costs.

Cash-and-carry arbitrage is a relatively low-risk strategy. However, it is not without its risks. One risk is that the basis can change between the time the trade is initiated and the time the trade is closed. If the basis changes, the trader may lose money on the trade.

Another risk is that the asset may decline in value between the time the trade is initiated and the time the trade is closed. If the asset declines in value, the trader may lose money on the trade.

Cash-and-carry arbitrage is a complex strategy that requires careful planning and execution. However, it can be a profitable strategy for experienced traders.