Cash-and-Carry Arbitrage

Cash and carry arbitrage is a trade that buys an asset in the spot (cash) market and sells a futures contract on it, then holds the asset until the futures expire and delivers it or lets the prices converge. If the futures price is higher than the spot price plus the full cost of carrying the asset (financing, storage and insurance, minus any income), the trader locks in a profit. The reverse version, reverse cash and carry, sells the asset and buys futures when futures are too cheap. These trades keep futures prices anchored to spot prices.

The logic#

Fair futures price, from the cost of carry:

fair futures = spot × (1 + financing rate × T) + storage costs - income

• If futures > fair value: buy spot, sell futures (cash and carry).
• If futures < fair value: sell or short spot, buy futures (reverse cash and carry).

See Spot vs Futures.

Worked example: gold#

Worked example: index arbitrage#

Index arbitrage applies the same logic to stock index futures: buy the basket of stocks and sell index futures when futures are rich, or the reverse when cheap. The carry is financing minus dividends. Because baskets have hundreds of stocks, index arbitrage is done by firms with fast execution and low costs. Their activity keeps index futures very close to fair value. See Arbitrage Strategies.

Worked example: crypto#

Bitcoin futures and perpetual swaps often trade above spot, sometimes at annualised premiums of 10% or more in strong bull markets. A trader can buy spot Bitcoin and sell futures to capture the premium as it converges at expiry, or collect funding payments on perpetuals. See Funding and Basis Arbitrage and Crypto Futures and Basis.

Why opportunities are rare and small#

• Many participants watch these spreads, especially in liquid markets.
• Costs (commissions, spreads, borrowing, storage) eat the gap.
• Capital and balance sheet constraints: banks and funds must allocate capital, which limits how much arbitrage they do. When balance sheets are tight, such as at quarter ends or during crises, gaps can persist.

Risks#

Cash and carry and contango#

Cash and carry trades are most attractive in steep contango. Their activity, buying spot and selling futures, narrows contango by lifting spot and lowering futures. When storage is constrained, the arbitrage cannot work and contango can become extreme. See Contango and Storage and Inventories.

Frequently asked questions#

What is cash and carry arbitrage?#

Buying an asset in the spot market and selling its futures contract when the futures price exceeds spot plus carrying costs, locking in the difference at expiry.

What is reverse cash and carry?#

Selling or shorting the asset and buying futures when futures trade below fair value, profiting as prices converge.

Is cash and carry arbitrage risk free?#

Not entirely. Financing, storage, delivery, margin and counterparty risks can turn an apparent arbitrage into a loss.

Next, learn the different kinds of futures spreads in Futures Spreads Explained.