Cash-And-Carry-Arbitrage
Cash-and-carry-arbitrage is a market-neutral strategy combining the purchase of a long position in an asset such as a stock or commodity, and the sale (short) of a position in a futures contract on that same underlying asset. It seeks to exploit pricing inefficiencies for the asset in the cash (or spot) market and futures market, in order to make profits.
Definition: Spot arbitrage is a market-neutral strategy where an investor buys an asset (such as stocks or commodities) in the spot market and simultaneously sells (shorts) a futures contract of the same underlying asset in the futures market. The goal is to profit from the pricing inefficiencies between the cash (or spot) market and the futures market.
Origin: The concept of spot arbitrage can be traced back to the early development of futures markets. The earliest futures markets appeared in 17th century Japan, where rice merchants used futures contracts to lock in future rice prices and avoid price volatility. As financial markets evolved, spot arbitrage became a common investment strategy, especially in the late 20th century, with advancements in computer technology and information transmission speeds making spot arbitrage more prevalent.
Categories and Characteristics: Spot arbitrage can be divided into two main types:
- Forward Arbitrage: When the spot price is lower than the futures price, investors buy the asset in the spot market and sell the corresponding futures contract, waiting for the prices to converge to close the position and profit.
- Reverse Arbitrage: When the spot price is higher than the futures price, investors sell the asset in the spot market and buy the corresponding futures contract, waiting for the prices to converge to close the position and profit.
- Market Neutrality: It does not rely on the overall market trend but focuses on the price difference between the spot and futures markets.
- Low Risk: By hedging spot and futures positions, it reduces the risk from market volatility.
- High-Frequency Trading: It often requires frequent trading to capture short-term price differences.
Specific Cases:
- Case One: Suppose an investor finds that the spot price of a commodity is 100 yuan, while the futures price for three months later is 110 yuan. The investor can buy the commodity in the spot market and sell the corresponding futures contract. After three months, if the spot and futures prices converge, the investor can close the position and profit.
- Case Two: An investor finds that the spot price of a stock is 50 yuan, while the futures price for one month later is 48 yuan. The investor can sell the stock in the spot market and buy the corresponding futures contract. After one month, if the spot and futures prices converge, the investor can close the position and profit.
Common Questions:
- Is spot arbitrage completely risk-free? While spot arbitrage reduces market risk through hedging, other risks such as liquidity risk, transaction costs, and execution risk still exist.
- What conditions are required for spot arbitrage? Spot arbitrage requires investors to have good market analysis skills, quick trade execution capabilities, and keen insight into market information.
