Cash-And-Carry-Arbitrage

Definition

Spot arbitrage is a market-neutral strategy that involves holding a long position in an asset (such as stocks or commodities) while simultaneously selling (shorting) a futures contract on the same underlying asset. It aims to exploit pricing inefficiencies between the cash (or spot) market and the futures market to generate profits.

Origin

The concept of spot arbitrage originated with the development of futures markets, particularly in the late 19th and early 20th centuries. As commodity futures markets matured, investors began to exploit price differences between spot and futures markets for arbitrage opportunities.

Categories and Features

Spot arbitrage can be categorized into commodity spot arbitrage and financial spot arbitrage. Commodity spot arbitrage involves physical commodities like gold and oil, while financial spot arbitrage involves financial assets like stocks and bonds. Its features include relatively low risk, as arbitrage trades are typically market-neutral, but it requires precise market analysis and rapid trade execution.

Case Studies

Case Study 1: During the 2008 financial crisis, some investors profited from spot arbitrage in the oil market. At that time, the spot market price of oil was lower than the futures market, allowing investors to lock in profits by buying spot oil and selling futures contracts. Case Study 2: In 2015, during significant volatility in the Chinese stock market, some investors used spot arbitrage strategies in the A-share market, profiting by buying undervalued spot stocks and selling overvalued futures contracts.

Common Issues

Common issues investors face when engaging in spot arbitrage include insufficient market liquidity, which can prevent timely trade execution, and increased market volatility, which can reduce arbitrage opportunities. Additionally, transaction costs and taxes may impact arbitrage profits.