Reverse Cash-and-Carry-Arbitrage

A combination of a short position in an asset such as a stock or commodity, and a long position in the futures for that asset. Reverse cash-and-carry arbitrage seeks to exploit pricing inefficiencies for the same asset in the cash (or spot) and futures markets in order to make riskless profits. The arbitrageur or trader 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 cheap in relation to the spot price of the asset. That is, the proceeds from the short sale should exceed the price of the futures contract and the costs associated with carrying the short position in the asset.

This strategy is only viable if the futures price is cheap in relation to the spot price of the asset. That is, the proceeds from the short sale should exceed the price of the futures contract and the costs associated with carrying the short position in the asset.

Consider the following example of 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 carrying costs on the short position (for example, dividends are payable by the short seller) amount to $2. In this case, the trader or 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.

 


Investment dictionary. . 2012.

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