What Is the Cash & Carry Model?

The cash and carry model is a financial model for arbitrage trading, which aims to take advantage of the fact that different investments pay different rates of return. Cash and carry uses a combination of long and short positions to create a risk-free investment.

Futures

Cash and carry hinges on futures contracts. A futures contract is a contract that obligates the holder to buy an asset--or set of assets--at a certain time and at a certain price. They can be bought and sold on open markets.

Basic Model

In a cash and carry deal, the investor acquires an asset, then acquires the futures contract for that asset at a higher price, which he then passes on. He then holds the asset until the futures contract is up, at which point he delivers and collects the money. This is where the name comes from--he buys with cash, then carries the asset.

Example

Assume a farmer sells a bushel of corn to a trader for $50. The trader then has another trader agree to a futures contract of $60 for the bushel in six months. The first trader then holds onto the corn, which costs $1 a month to store ($6); at the conclusion of the futures contract, the first trader gives it to the second trader, who pays him the $60 he agreed to. The first trader has made $4: $60 - $50 - $6.

References

• Investopedia: Cash-And-Carry Definition
• Investopedia: Futures Definition