Cash and Carry Arbitrage
Buying the underlying in the cash market while selling its futures, locking in the basis as a return.
Formula
Locked-in Return = (Futures Price - Spot Price - Transaction Costs) / Spot Price, annualised over the days to expiry
Unit
%
In depth
The strategy earns the basis, which converges to zero at expiry by arbitrage, so the return is known at inception provided the position is held to expiry. It is the mechanism that keeps futures prices tied to spot, and it is the engine inside arbitrage mutual funds, which is why those funds' returns track short-term rates rather than the market. The reverse trade, selling spot and buying futures, is harder in India because borrowing stock to short is limited. Its risks are funding, margin calls on the futures leg before expiry, and the transaction costs that can exceed a narrow basis entirely.
Worked example
Buy the index basket at 24,000 and sell futures at 24,250 with 30 days to expiry. The 250-point gap is 250 / 24,000 = 1.04% over 30 days, or about 12.7% annualised before costs — which is why the gap rarely persists.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Cash and Carry Arbitrage” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.