Create an example to illustrate how to profit from a “cash and carry” and “reverse cash...

Create an example to illustrate how to profit from a “cash and carry” and “reverse cash and carry” strategy?

Expert Solution

Cash and carry arbitrage

Cash and carry arbitrage are when you buy the underlying asset and sell the future contract to benefit from the mispricing between the two.

Let say an asset today sells for $1000 and the 1 month future contract sells for $1100, now the cost associated with holding like storing, financing and insurance cost are say $85, here if you buy the asset and sell the future contract then you have an arbitrage gain of $15. So, in cash and carry arbitrage you are long the asset and short the future contract.

Reverse cash and carry arbitrage

Reverse cash and carry arbitrage is where there is price discrepancy between the underlying stock and future price, so here you short the asset and long the future contract.

Lets say in the above example, the underlying stock sells for $1100 and the 1 month future contract sells for $1000, now the cost associated with shorting the stock is say $80 , here you can short the stock at $1100 and go long the future contract at $1000 and after considering the cost associated the arbitrage gain would be around $20.

jeff jeffy answered 1 year ago

example of reverse offshoring

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