What is a Cash and Carry Trade?
The cash and carry trade is a type of arbitrage strategy that involves two trade components in order to complete the transaction. Essentially, a security will be purchased, and the asset underlying the security is sold at a short trade. In other instances, a cash and carry trade will involve the purchase of a security and the subsequent sale of a similar security. Cash and carry trades are sometimes referred to as trading on the basis or basis trading. It is not unusual for the transaction to involve futures as the component that is sold after a similar security is purchased. The components involved in the strategy can be a stock, a commodity or an index as the security that is purchased, while a futures contract will often be the component utilized for the sale that completes the arbitrage approach. One of the ideas behind the cash and carry trade is to deal with situations where the investor feels there is there is a discrepancy between the prices of the two securities involved. Esse