What Is a Cash & Carry Format?

Cash and carry requires capital.

Cash and carry is a form of arbitrage in which traders attempt to use assets and futures on that asset to create a risk-free investment. They require a lot of capital and excellent timing, but if performed correctly they can provide a slow, steady cash flow.

Futures

The cash-and-carry format involves futures contracts. These are contracts that obligate holders to buy an asset at a certain time at a certain price. They are often used as a hedge to counteract investments in the other direction.

Cash and Carry

The cash-and-carry format of arbitrage is when a trader owns the futures contract on an asset and the asset itself. So, if someone has $100 worth of goods and a $120 futures contract on those goods, he can pass on the contract, hold the goods, then give them to the futures holder in exchange for the previously-set price of $120--a $20 profit before holding costs and broker fees.

Associated Costs

Cash and carry has a lot of associated costs, which is what makes them difficult to carry out. Broker fees impinge on almost every part of the deal, and the trader needs to keep the asset somewhere--another associated costs. Finally, these deals require large amounts of capital, which, if not on hand, will incur interest.

References

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