Cash-and-carry arbitrage is a relative-value strategy that seeks to lock in a futures price above the cost of acquiring and carrying the corresponding cash asset. In the classic trade, the arbitrageur buys the underlying asset in the spot or cash market and simultaneously sells the related futures contract, then holds the asset until the futures position converges with cash or is settled, using delivery when the contract and the strategy call for it. The trade is therefore built around a financing-and-carry relationship, not a directional forecast.
The futures premium is not the arbitrage profit
The relevant comparison is between the futures sale price and the all-in net cost of owning the cash asset to the futures horizon. For a storable physical commodity, that cost can include financing, storage, insurance, handling and delivery-related charges. For a financial asset, financing is also central, while income received during the holding period—such as dividends or coupons—reduces net carry. A futures price above the current spot price is therefore not enough by itself: contango can simply be the price relationship required to compensate the holder for carrying the asset.
Suppose an asset can be bought for 100 and a futures contract sold for 104. If the financed cost of carrying and settling the asset to expiration is 5, the visible four-point cash-futures spread is not an arbitrage profit. If the modeled carrying and settlement cost is 2, both legs can be executed and maintained at those terms, and no material costs or mismatches have been omitted, the remaining two-point spread is the theoretical cash-and-carry margin before taxes.
Deliverability can decide whether the arbitrage is real
In physically settled commodity markets, a generic spot quote may be a poor proxy for the asset that can actually satisfy futures delivery. Contract grade, delivery location, freight, quality differentials and tender-related costs can determine whether the purchased inventory is economically equivalent to the futures deliverable. This is why an apparent arbitrage on a screen can disappear when the path from cash inventory to acceptable delivery is modeled correctly. The same principle applies to bond futures with multiple eligible delivery securities: the deliverable chosen, its conversion mechanics and the settlement convention can materially alter the economics.
Cash-and-carry activity also helps keep cash and futures prices aligned as settlement approaches. Buying cash while selling futures can increase demand in the cash market and add selling pressure in futures, narrowing an excessive discrepancy. But the textbook lock is only as strong as its implementation. Variable funding costs, margin liquidity needs, execution slippage, delivery constraints, mismatched assets or an inability to hold the trade through the relevant settlement process can leave residual risk.
The practical boundary is simple: cash-and-carry arbitrage is not synonymous with a futures premium, contango or a wide cash-futures spread. It exists only when an executable cash-plus-carry position can be matched against the futures sale at a sufficiently favorable all-in price.