Cash-and-carry arbitrage buys a spot asset and sells a futures or forward contract when the futures price exceeds full carry cost.
Cash-and-carry arbitrage is a spot-futures strategy that buys the underlying asset in the cash market and sells a futures or forward contract when the futures price is high enough to cover the spot purchase, financing, storage, insurance, delivery, and transaction costs. The trade is only attractive if the apparent spread remains positive after all practical costs and execution risks.
The idea is simple: buy the asset now, carry it until delivery or contract closeout, and lock in the futures sale price. In practice, the trade depends on financing rates, margin calls, delivery rules, storage availability, borrow or custody constraints, and whether quoted prices are actually executable at the needed size.
| Step | Trader action | Main evidence |
|---|---|---|
| Buy spot asset | Purchase or finance the underlying asset. | Executable spot price, custody, storage, borrow, and settlement terms. |
| Sell futures or forward | Lock in a future sale or settlement price. | Futures quote, contract size, delivery month, margin, and exchange rules. |
| Carry the position | Hold the asset until delivery, expiry, or unwind. | Financing cost, storage/insurance, income, margin calls, and liquidity. |
| Close or deliver | Deliver, cash settle, or unwind both legs. | Delivery procedures, basis convergence, transaction costs, and tax records. |
A simplified trade edge is:
where (F) is the futures or forward sale price, (S) is the spot purchase price, and net carry includes financing, storage, insurance, custody, and other holding costs minus income or convenience benefits from holding the asset.
A trader can buy a commodity for $1,000, finance and store it for $18 until the futures delivery month, and sell a matching futures contract for $1,025. Before taxes and operational frictions, the apparent edge is:
That $7 is not automatically usable edge. Bid-ask spread, brokerage costs, delivery grades, storage constraints, failed delivery, margin calls, and price movement before both legs are executed can erase the spread.
| Strategy | Typical signal | Main constraint |
|---|---|---|
| Cash-and-carry | Futures price is high versus spot plus carry. | Financing, storage, margin, delivery, and long-spot custody. |
| Reverse cash-and-carry | Futures price is low versus spot plus carry. | Ability to borrow or short the spot asset, recalls, short costs, and settlement. |
| Evidence | Why it matters |
|---|---|
| Executable spot and futures quotes | Indicative quotes may not fill at the required size. |
| Contract specifications | Delivery month, quality, location, cash settlement, and contract size drive basis risk. |
| Financing and margin terms | Funding cost and daily variation margin can change cash needs. |
| Storage, insurance, and custody | Physical or custodial constraints can make the trade infeasible. |
| Income or convenience yield | Dividends, coupons, lease rates, or convenience benefits affect net carry. |
| Tax and accounting treatment | Realized economics may differ from the pre-tax spread. |
| Exit plan | Liquidity can vanish before delivery or unwind. |