Cash-and-carry arbitrage is important in futures markets because it helps traders make risk-free profits when there is a price difference between the spot market and futures market. It also keeps prices of futures and spot aligned. This strategy increases efficiency in the market and helps reduce price mismatches over time.

What is Cash-and-Carry Arbitrage?

Cash-and-carry arbitrage is a trading strategy where a trader buys an asset in the spot market and sells the same asset in the futures market to lock in a profit. The idea is to earn from the price gap between the spot and futures price, while holding the asset until the futures contract expires.

How Does It Work in Futures Markets?

In futures markets, if the futures price is higher than the spot price plus carrying cost (like interest and storage), traders can do arbitrage. They buy the asset in the spot market and sell it in futures. At expiry, they deliver the asset, complete the contract, and pocket the difference as profit.

Why is This Strategy Useful?

This strategy helps to remove pricing errors in the market. If futures prices are too high compared to the spot price, arbitrage traders will step in. Their activity brings futures and spot prices closer. It also creates liquidity and helps maintain balance in the market.

What Are the Benefits of Cash-and-Carry Arbitrage?

The biggest benefit is low-risk profit. If done correctly, it offers almost guaranteed gains because of the locked-in price difference. It also helps new traders learn how futures and spot markets work together. Additionally, it improves pricing accuracy in the futures market.

What Are the Risks Involved?

Though the strategy is low-risk, it's not risk-free. You may face risks like storage costs, borrowing costs, delivery issues, or sudden market changes. Also, if you can’t deliver the asset at expiry, the trade could lead to losses. So, proper planning and calculation are important.

Should Indian Traders Use This Strategy?

Yes, Indian traders can use cash-and-carry arbitrage in the stock and commodity futures markets. NSE and MCX offer good opportunities. But it requires capital, planning, and understanding of the markets. It’s ideal for experienced traders or those who want low-risk returns using futures.