What is Cash and Carry Arbitrage?

Cash-and-carry arbitrage works when an asset is cheaper in the cash market and its futures price is higher. For example, if you buy at ₹1,000, sell futures at ₹1,400, and your total cost is ₹300, the remaining spread is ₹100.

• Cash price: ₹1,000
• Futures price: ₹1,400
• Carrying cost: ₹300
• Possible spread: ₹100
• The strategy does not guarantee profit.
• Extra costs can reduce or remove the price difference.
• Low liquidity or poor execution can also hurt the result.

Yes, but only if the price difference is bigger than every cost you pay.

Suppose an asset costs ₹1,000 today.

Its futures contract is available at ₹1,400.

You spend another ₹300 to hold the asset until the futures contract expires.

Your calculation is:

₹1,400 - ₹1,000 - ₹300 = ₹100

The ₹100 is the possible spread.

But that ₹100 is not guaranteed. Brokerage, financing cost, margin cost, or a poor trade price can reduce it.

Understand it with a simple example

Suppose Ramesh is an auto driver in Nashik.

He earns ₹35,000 per month and wants to understand how traders try to earn from price differences.

The trader does two things:

1. Buys the asset for ₹1,000.
2. Sells its futures contract for ₹1,400.

The trader then keeps the asset until the futures contract expires.

The basic calculation is:

Possible spread = Futures price - Cash price - Carrying cost

Possible spread = ₹1,400 - ₹1,000 - ₹300

Possible spread = ₹100

The useful point is simple: the trader is trying to keep the price difference left after paying all costs.

What can eat into your ₹100?

The biggest mistake is looking only at the ₹1,000 buying price and ₹1,400 futures price.

You also have to pay the cost of holding the asset.

This is called the cost of carry.

It can include:

• Financing cost
• Storage cost
• Insurance cost
• Brokerage
• Transaction charges
• Margin-related costs
• Other holding expenses

If your costs rise, your possible spread falls.

For example:

₹1,400 - ₹1,000 - ₹400 = ₹0

If your total cost becomes ₹400, there is no spread left in this example.

The cash market is where you buy or sell an asset at its current price. It is also called the spot market.

For example, if an asset is trading at ₹1,000 today and you buy it now, ₹1,000 is its cash market price.

A futures contract is an agreement to buy or sell an asset at a fixed price on a future date.

In cash-and-carry arbitrage, the trader usually:

• Buys the asset in the cash market
• Sells the futures contract
• Holds the asset until expiry
• Uses the asset to meet the futures obligation

You do not need to remember every technical term first.

The main idea is this: buy cheaper now, lock a higher futures price, and check what remains after costs.

What can go wrong?

A price gap on the screen does not mean you will definitely make money.

Your costs may rise

Financing, storage, brokerage, or margin costs can become higher.

That can reduce the spread.

You may get a different trade price

The price you see on the screen may change before your trade happens.

This is execution risk.

You may not find enough buyers or sellers

Some contracts may have low liquidity.

That means it may be harder to buy or sell at the price you expect.

Futures can add more risk

Futures are derivatives.

They can involve margin requirements, leverage, liquidity risk, and execution risk.

A small mistake in price or cost can make a big difference to the final result.

Why do these opportunities disappear fast?

Many traders watch the same price difference.

When they see the opportunity, they start buying in one market and selling in the other.

This activity can push the two prices closer.

Once the price gap becomes too small, the opportunity can disappear.

So, a large gap may not remain available for long.

What if futures are cheaper?

Sometimes the opposite price situation happens.

The futures price may be lower compared with the cash price.

A trader may then use the opposite set of transactions.

This is called reverse cash-and-carry arbitrage.

In simple terms:

• Cash-and-carry looks for a relatively expensive futures price.
• Reverse cash-and-carry looks for the opposite price setup.

The idea is still to use a price mismatch between the cash and futures markets.

The idea is easy to understand, but the actual trade is more difficult.

Before using it, you need to understand:

• Cash market
• Futures contracts
• Expiry
• Margin
• Carrying cost
• Liquidity
• Brokerage
• Execution price

A ₹100 price gap does not automatically mean ₹100 profit.

First calculate every cost.

The strategy tries to use a price difference instead of depending only on the asset price going up.

But the benefit exists only when the price gap is large enough after all costs.

That means the most important question is not:

“How big is the difference between cash and futures?”

The better question is:

“How much money is left after every cost?”

Cash-and-carry arbitrage tries to earn from a difference between the cash price and futures price. The simple flow is: Buy in cash market → sell futures → hold until expiry → subtract all costs.

The calculation looks simple, but the actual trade can involve brokerage, financing cost, margin, liquidity, and execution risk. So, always look at the amount left after all costs, not just the price difference.