Definition
Cash-and-Carry Arbitrage
Cash-and-carry arbitrage profits from a futures premium by buying the stock in cash and selling its future simultaneously.
When a futures contract trades above its fair value, an arbitrageur buys the underlying in the cash market and sells the future, locking the gap. At expiry the two prices converge, and the trader pockets the difference minus the cost of carry — a near risk-free spread.
NSE arbitrage desks and even retail arbitrage funds run this on stocks when the basis is wide. The reverse — buy futures, sell spot — is reverse cash-and-carry, used when a future trades below fair value, often around large dividends or in backwardation.
Related terms
- BackwardationBackwardation is when futures trade below the spot price, often signalling bearishness or heavy dividends.
- Cost of CarryCost of carry is the net cost of holding an asset to a future date, comprising financing cost less any income, and it determines the fair-value difference between a futures price and the underlying spot price.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.