Cash-and-carry arbitrage in futures explained

A simplified fair-value relationship is:

`fair futures price ≈ spot × (1 + financing rate × time) − income + storage and other carry costs`

The exact model depends on compounding, dividends, convenience yield, currency, and settlement. If spot is 100, annual financing is 5%, expected income is 1%, and three months remain, a simple estimate is 100 + 1.25 − 0.25 = 101.00 before other costs. A futures quote of 101.40 is a 0.40 gross premium, not a 0.40 guaranteed return

Use the same timestamp and comparable deliverable for spot and futures. Futures basis and fair value explains why a quote can differ from a simple spot comparison

The classic trade buys spot and sells the futures bid, or buys the underlying at its ask and sells the futures at its bid. Estimate both directions with actual sizes. A midpoint-based spread can disappear when the stock is hard to borrow, the futures book is thin, or the hedge cannot be entered simultaneously

Include:

• spot bid-ask, futures bid-ask, commissions, exchange fees, and market impact
• stock borrow or repo availability, financing rate, and collateral haircuts
• dividends, distributions, storage, insurance, transport, and delivery location
• contract multiplier, minimum tick, settlement method, and conversion or currency costs
• margin funding and the risk of an intraday or overnight requirement change

Suppose one futures contract represents 100 units. You buy 100 units of spot at 100.10, finance $10,010 for three months at an effective cost of $125, receive $25 of income, and sell the futures at 101.40. At settlement, the futures sale delivers $10,140 of proceeds. Before fees and operational costs, the package result is:

`10,140 − 10,010 − 125 + 25 = 30`

The apparent 40-point futures premium became only $30 after financing and income. If execution, borrow, fees, and delivery total more than $30, the trade is negative. If the position is cash-settled, the hedge must be unwound and its basis may differ from a deliverable contract

The legs may not match perfectly. A stock index future references a basket, a commodity future has a delivery grade and location, and a currency future has settlement and funding conventions. The spot asset can be unavailable, recalled, or subject to a corporate action. A margin call can arrive before the final convergence even when the modeled final cash flow is positive

Do not treat a fair-value estimate as a trading signal. Record the contract month, delivery rule, financing source, income schedule, quote timestamps, and a maximum all-in cost. Basis convergence vs. roll yield helps separate convergence from the cost of changing contract months

• Match the underlying, multiplier, currency, maturity, and settlement method
• Calculate financing, income, storage, insurance, delivery, and tax assumptions
• Use executable prices for every leg and a realistic order size
• Stress a delayed hedge, wider spread, borrow recall, and higher margin
• Confirm how the position is closed if delivery or cash settlement occurs
• Keep a cash buffer for mark-to-market losses and changing requirements

This guide explains futures cash flows for education. Confirm current contract rules, financing terms, margin requirements, tax treatment, and broker execution conditions before trading