Cash and Carry Basis

Buy the asset, sell the future, collect the difference

When a dated future trades above spot, the gap can be captured by buying the asset and selling the future against it, then holding both to expiry. The trade is as old as futures markets and is arithmetically simple: the return is the basis, annualised. What makes it worth studying is everything that is not in the arithmetic — the margin on the short leg, the cost of holding the long leg, and the assumption that both legs survive to expiry.

Open in the app · Alternative Underlyings · intermediate

Alternative Underlyings is part of the OTC Learn subscription. Everything the app shipped with — 36 products across six asset classes — stays free.

What the lesson covers

1. What it is
2. What the basis is made of
3. Why it’s used
4. The funding-rate version
5. Risks to watch

Key terms

• Basis — The difference between a future’s price and the spot price of the underlying it references.
• Cash and carry — Buying the underlying and selling the future against it to capture the basis until expiry.
• Cost of carry — Interest, storage and insurance less any income — what the basis should equal in an orthodox market.
• Annualised basis — The spread scaled to a yearly rate, which is the only form in which two contracts are comparable.
• Reverse cash and carry — The mirror trade — short the asset, long the future — which requires borrowing the underlying.
• Convergence — The narrowing of the basis to zero at expiry, which is what makes the captured spread a return.

In practice

Cash and carry is run in every futures market there is — commodities, equity index, government bonds, digital assets — usually by participants whose real business is lending cash or holding inventory. Where the basis is unusually wide, the first question is not “free money” but “what stops everyone doing this”, and the answer is normally balance sheet, borrow, or access.

Read next

• Perpetual Swap — A future with no expiry, held to spot by a payment
• FX Swap — Exchange currencies now and reverse it later
• Commodity Forward — Agree a price today for delivery later

In the app, Cash and Carry Basis carries a five-step lesson, a worked example and a bank of twelve questions drawn differently every sitting.

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Educational content only. Nothing here is financial advice, an offer to trade, or a recommendation to buy or sell any instrument.