Cash-and-Carry Arbitrage

Cash-and-Carry Arbitrage

A cash and carry arbitrage trade seeks to exploit any mispricing between the forward price of an asset and its prevailing futures price in order to capture a risk-free profit. If the futures price is higher than the forward price (i.e. too expensive) a trader would buy the spot, pay the carry and sell the future. The difference between the forward price and the futures price would be their arbitrage profit. A reverse cash and carry arbitrage, sell spot and buy futures, would be undertaken if the futures price was below the forward price. E.g. Spot (100) + cost of carry (5) = forward price of 105. Futures price = 108 Cash and carry arbitrage = buy spot and sell futures to capture risk-free profit of 3 (108-105), excluding transaction costs.

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