Reverse Cash and Carry Arbitrage

Posted in Finance, Accounting and Economics Terms, Total Reads: 64
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Definition: Reverse Cash and Carry Arbitrage

Reverse cash and carry arbitrage is a technique employed by a trader or broker when he thinks that the price of the asset ( Stocks or commodities or Currency) is going to crash in the near future. The trader/brokers take the position of short/ sale of the assets and simultaneously buy a future of same amount of asset. It is method used to exploit the inefficiencies in the market.

The viability of this method is there only if the prices of the asset will decrease in the future. The money received from sale of the asset should be more than the sum total of carrying cost and buy of the asset at the future date. If the future asset price is high then the trader/ broker will make loss on this transaction.

It is important to note that the all the corporate right, which includes dividends, voting right, remains the original owner of the transaction. In this case, It is the original seller of the assets (stocks/commodities/Currencies).

Example

Prices at start of month:

Price of asset: $204 Price of month Future: $ 200.

It indicates the market expectations are that the price of the asset will come down in the future.

Carrying Cost: $2

Takes a short position/sales asset

He receives $204 with a contract to return asset at the end of month. Hence, He buys future of the asset.

At the month, If the price of asset is $190. Profit = 204-2-190 = $ 12

At the month, If the price of asset is $210. Loss = -204+2+210 = $8

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