Summary
TLDR: Cash and carry arbitrage is a strategy where traders profit from price differences between spot and futures markets. By going long in the spot market and short in futures, they can benefit when futures trade at a premium. As futures approach expiry, the premium disappears, leading to a low-risk return for the arbitrageur.
Key Points
1. Cash and carry arbitrage is a market-neutral strategy that involves taking a long position in the spot market and a short position in futures when futures are trading at a premium to spot prices.
2. The goal of cash and carry arbitrage is to profit from price discrepancies between spot and futures markets by exploiting the difference in prices.
3. As futures contracts approach their expiry date, the premium between futures and spot prices tends to diminish, ultimately leading to convergence on the settlement date and generating a relatively risk-free return for the arbitrageur.