A futures contract is a financial agreement between two parties, where they agree to buy or sell a commodity, stock, or any other financial instrument at a future date. The price of the underlying asset is fixed at the time of the agreement, and the deal is settled on the agreed-upon date.
A futures contract cash and carry is a specific type of futures contract where the buyer purchases a futures contract and simultaneously buys the underlying asset in the spot market (cash market), which is then held by the buyer until the futures contract expiration date. This type of transaction is called a “cash and carry” because the buyer carries the asset and uses the cash from their purchase of the futures contract to pay for it.
The cash and carry strategy is commonly used in arbitrage, which is a trading strategy that seeks to profit from price differences between two or more markets. In this case, the buyer of the futures contract expects the price of the underlying asset to increase over time, which means the value of the futures contract will also increase. By purchasing the underlying asset at the same time as the futures contract, the buyer can lock in a profit when the contract expires by selling the asset at a higher price.
To illustrate this concept, let`s take the example of a crude oil futures contract. Suppose you want to buy a crude oil futures contract that expires in three months, and the current price of the contract is $60 per barrel. You expect the price of crude oil to increase over the next three months, so you buy a futures contract and simultaneously buy 100 barrels of crude oil in the spot market for $6,000 ($60 per barrel).
Three months later, the crude oil futures contract expires, and the price has increased to $70 per barrel. You sell the futures contract for $7,000 ($70 per barrel) and sell the 100 barrels of crude oil for $7,000, making a profit of $1,000. The profit comes from the difference between the price you paid for the crude oil and the price you sold it for (plus any fees or transaction costs).
In summary, a futures contract cash and carry is a trading strategy that involves buying a futures contract and simultaneously buying the underlying asset in the spot market. The goal is to profit from price differences between the futures contract and the spot market by holding the asset until the futures contract expires. This strategy requires careful planning and analysis, and it is not without risks, but it can be a useful tool for investors and traders looking to profit from market inefficiencies.