What is the Cache-and-carry trade’
The cache-and-carry trade (sometimes referred to simply as the “carry trade”) and trading strategy in which the investor has a long position in a security or commodity at the same time selling this, in particular, by holding a short position in a futures contract or option contracts in a same security or commodity. In the cache-and-carry-trade, which is also known as “basis trading” assets before the delivery date under the contract, and is used to cover liabilities in the short positions. Often, carry trades are implemented to take advantage of anticipated interest rate, is generated from a position that may be more profitable than a borrowing or lending through traditional channels.
Breaking down the ‘wholesale trade’
The cache-and-carry trade has several steps. The investor must first purchase a security or commodity. He or she then sells a futures contract on the same security or commodity. It holds or “carries” that security or commodity up until the futures contract expires. When this happens, the investor delivers the commodity or security he had previously bought.
Selling a futures contract, the investor took a short position, and knows how many will be made on the delivery date and the cost of security due to the wholesale long position component of the trade. For example, in the case of bonds, the investor receives coupon payments from the bonds it bought, plus investment income from investing the coupons, and also pre-fixed price on a future delivery date.
The rationale for the wholesale trade
Investors use this arbitrage strategy current costs for the purchase of securities or goods as well as the cost of carry, less, how many securities or commodities may be sold in the future. In other words, the investor believes that securities are undervalued at present, and that he can profit from their subsequent correction.
Suppose at the moment the asset is trading at $100, while the monthly futures contract at a price of $104. In addition, monthly carrying costs such as storage, insurance, and financial costs for this asset amount to $2. In this case, the trader or arbitrageur would buy the asset (or open a long position in it) at $100 and simultaneously sell one month futures contract (i.e., to initiate a short position in it) at $104. Then the trader would carry the asset until the date of expiry of the contract, and deliver it to contract, thereby providing arbitrage or risk less profit of $2.
Obviously, this strategy is only viable if the ultimate cash inflow from the short futures position exceeds the acquisition cost and the cost of the long position of the asset.
Negative Basis Trade
This concept can be transferred to the credit derivatives market, where the basis (the difference between the price of goods for immediate cash and futures prices) is the difference in spread between credit default swaps (CDS) and bonds for the same debt Issuer and similar, if not exactly equal maturities. Here, the strategy is called a negative basis trade. (In the market of credit derivatives, basis can be positive or negative; a negative basis means that the distribution CD is less than the bond spread.) Trade is usually done with bonds, which were trading at par or at a discount, and in single-name CDs (as opposed to index CDS) term equal to the maturity of the bond. (For more information, see how to get positive results with negative basis trades.)
Cash transaction with the use of options
In the options market, example of trading is the spread window. Here, the trader shorts synthetic base (selling a call and buying a put at the same expiry and strike) at the same strike price and goes a long synthetic underlying asset at higher strike price (or Vice versa). The difference in the price of the box spread from the difference between strike prices it is to wear. For example, if a trader commits to trade through a spread in the S&P 500, and 1000 and 2000 shocks, if the spread is worth $1,050, at$ 50 represents the interest rate associated with the cost of carry.