# Cash-and-Carry Arbitrage

> Cash and carry arbitrage buys an asset and sells its futures when futures are rich versus carry costs. Learn the formula, gold, index and crypto examples, and risks.

Source: https://learn.tradelabsai.com/futures/cash-and-carry-arbitrage/  
Track: Futures · Level: Advanced · Updated: 2026-10-03  
Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice.  
Cite as: TradeLabs Learn, "Cash-and-Carry Arbitrage", https://learn.tradelabsai.com/futures/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](https://learn.tradelabsai.com/futures/spot-vs-futures/).

## Worked example: gold

**Example: Gold cash and carry**
Spot gold is $2,000 an ounce. Six month gold futures trade at $2,075. Financing costs 5% a year, and storage and insurance cost $4 an ounce for six months.

Fair value ≈ 2,000 × (1 + 0.05 × 0.5) + 4 = 2,000 × 1.025 + 4 = $2,054.

The futures are $21 above fair value. A trader:
1. Borrows $2,000 and buys one ounce of gold.
2. Sells futures at $2,075.
3. Stores the gold for six months.
4. At expiry, delivers the gold and receives $2,075.
5. Repays $2,050 (loan plus interest) and $4 storage.

Profit: 2,075 minus 2,050 minus 4 = $21 per ounce, about 1% in six months with no exposure to the gold price. On one 100 ounce contract, $2,100 before transaction costs.

## 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](https://learn.tradelabsai.com/strategies/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](https://learn.tradelabsai.com/crypto/funding-and-basis-arbitrage/) and [Crypto Futures and Basis](https://learn.tradelabsai.com/crypto/crypto-futures-and-basis/).

**Example: Crypto basis**
Spot Bitcoin is $60,000 and the quarterly future, expiring in 90 days, is $61,500. The premium is 2.5%, about 10% annualised (2.5% × 365 / 90). A trader buys 1 BTC spot and sells 1 BTC of futures. At expiry, the futures converge to spot, and the trader earns about $1,500 minus fees, whatever Bitcoin's price does. The main risks are exchange failure, collateral management and liquidation of the short futures leg if margin is not maintained in a sharp rally.

## 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

| Risk | Example |
|---|---|
| Financing risk | Borrowing rates rise during the trade |
| Storage risk | Storage unavailable or more costly (crude oil, 2020) |
| Delivery risk | Quality or location issues in delivery |
| Short squeeze (reverse trades) | Borrowed asset recalled |
| Counterparty or platform risk | Crypto exchange failure, such as FTX in 2022 |
| Margin calls | The futures leg needs cash even though the overall position is hedged |

## 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](https://learn.tradelabsai.com/futures/contango/) and [Storage and Inventories](https://learn.tradelabsai.com/commodities/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](https://learn.tradelabsai.com/futures/futures-spreads-explained/).

## Continue learning

- Next lesson: [Futures Spreads Explained](https://learn.tradelabsai.com/futures/futures-spreads-explained/)
- Previous lesson: [First Notice Day and Last Trading Day](https://learn.tradelabsai.com/futures/first-notice-day/)
- Related: [First Notice Day and Last Trading Day](https://learn.tradelabsai.com/futures/first-notice-day/): First notice day is when sellers can start delivering on physically settled futures. Learn what it means, how it differs from last trading day and how to plan.
- Related: [Spot vs Futures](https://learn.tradelabsai.com/futures/spot-vs-futures/): Spot is the price for immediate delivery; futures price delivery later. Learn the cost of carry formula, why futures trade above or below spot and convergence.
- Related: [Basis and Basis Trading](https://learn.tradelabsai.com/futures/basis-and-basis-trading/): Basis is the gap between a spot price and a futures price. Learn how hedgers manage basis risk, how basis trades work and the Treasury basis trade.
- Related: [Arbitrage Strategies](https://learn.tradelabsai.com/strategies/arbitrage-strategies/): Arbitrage strategies try to profit from price gaps between the same or linked assets. Learn the main types, worked examples and why arbitrage is rarely riskless.
- Related: [Funding and Basis Arbitrage](https://learn.tradelabsai.com/crypto/funding-and-basis-arbitrage/): Funding and basis arbitrage buys crypto spot and shorts perps or futures to earn the premium while staying neutral. Learn the mechanics, returns and risks.
- Related: [Contango](https://learn.tradelabsai.com/futures/contango/): Contango is when later futures trade above nearer ones or spot. Learn why it happens, how it erodes long commodity and VIX funds, and how traders use it.