Cash-and-carry arbitrage is an investment strategy that is designed to take advantage of price discrepancies across different markets by buying an asset in the spot market and selling a corresponding futures contract in the futures market. It is a trading strategy that seeks to capitalize on mispricings between spot and futures contracts and is based on the idea that an asset should have consistent pricing between the two markets. This can be particularly beneficial during periods of high volatility as the price discrepancies can offer investors the opportunity to earn high returns if they time their trades correctly.

The name cash-and-carry arbitrage aptly describes how the strategy works. An investor simultaneously purchases an asset in the spot market and simultaneously opens a short position on a corresponding futures contract in the futures market. This locks in a profit if the asset’s spot price is lower than its futures price. The investor can then “carry” the asset until the expiry date for the futures contract. If the cost of physically “carrying” the asset (i.e., the cost of storage and other carrying costs) is lower than the profit from the trade then the investor will come out ahead.

Despite the potential for large profits in cash-and-carry arbitrage, there are also risks involved. The most significant risk is that the asset could move against the investor during the period between buying in the spot market and selling in the futures market. If this were to happen, then the investor would end up with a loss in the spot and a corresponding equal loss in the futures market. Additionally, there may be expenses associated with physically “carrying” an asset until expiry. These expenses may include storage, interest costs, insurance, and taxes depending on where the asset is located. All of these costs must be factored into the profitability of the trade.

In conclusion, cash-and-carry arbitrage can be a powerful tool for investors to exploit pricing inefficiencies between spot and futures markets, but it is not without risk. It is therefore important for investors to be aware of the risks involved and understand the cost of “carrying” the asset until expiry. If done correctly, cash-and-carry arbitrage can provide investors with the opportunity to generate high returns in volatile markets.