Cash-and-Carry Arbitrage

    graph LR
	A[Purchase Asset in Spot Market] --> B[Carry Costs]
	B --> C{Compare Price}
	C --> |Higher Futures Price| D[Short Futures Contract]
	D --> E[Delivery & Profit]

## What does cash-and-carry arbitrage involve? - [x] Buying in the spot market and selling in futures - [ ] Buying in futures and selling in the spot market - [ ] Only selling short in the futures market - [ ] Riding the wave of market trend > **Explanation:** Cash-and-carry arbitrage specifically involves a simultaneous transaction of going long in the spot market while going short in the futures. ## What potential costs should an arbitrageur be aware of? - [ ] None at all - [x] Carrying costs such as storage and insurance - [ ] High profits associated with holding - [ ] Utility bills from keeping the lights on > **Explanation:** Carrying costs like storage and insurance can offset potential profits from the arbitrage strategy. ## When is cash-and-carry arbitrage deemed ideal? - [ ] When markets are perfectly efficient - [ ] When there’s no risk at all - [x] When futures prices are higher than spot prices - [ ] Just before a major sporting event > **Explanation:** Cash-and-carry arbitrage is ideally executed when the futures contract's price exceeds the spot price, creating an opportunity to profit. ## What does the term "carry" refer to in cash-and-carry arbitrage? - [ ] Streaming an awesome financial podcast - [ ] Handling presents during the holidays - [x] Holding onto an asset until the expiration of the futures contract - [ ] Loading your portfolio with stocks > **Explanation:** In this context, "carry" refers to holding or maintaining the asset physically until the futures contract's delivery date. ## What happens if the prices converge before you can sell the futures? - [x] You might not make a profit - [ ] You automatically lose money - [ ] You become an asset hoarder - [ ] You become the market change agent > **Explanation:** If spot and futures prices converge, the opportunity for a profit diminishes or might disappear altogether. ## What is a significant risk associated with cash-and-carry arbitrage? - [ ] The risk of overspending during market crashes - [ ] Volatility of pizza delivery prices - [x] Carrying costs associated with the asset - [ ] Having to pay taxes on profits > **Explanation:** Carrying costs can be burdensome and can substantially impact the profitability of this strategy. ## What motivates traders to engage in cash-and-carry arbitrage? - [ ] To impress friends at cocktail parties - [x] To profit from pricing discrepancies - [ ] To prepare for the next stock market crash - [ ] To occupy time in their busy schedule > **Explanation:** Traders capitalize on the gaps between spot and futures prices creating an arbitrage opportunity for profit. ## What is the fundamental concept behind cash-and-carry arbitrage? - [ ] Fishing for compliments - [ ] Buying low and selling high - [x] Exploiting pricing inefficiencies - [ ] Buying every cool gadget you see on TV > **Explanation:** The core idea behind cash-and-carry arbitrage is to take advantage of price differences between the futures and the underlying asset. ## Which of the following is true about futures contracts in arbitrage? - [x] They must be overpriced relative to the spot market for arbitrage to be profitable - [ ] They are always cheaper than spot prices - [ ] They don't involve any risk at all - [ ] They're just fancy contracts people like to keep > **Explanation:** For cash-and-carry arbitrage profitability, futures contracts need to be overpriced relative to the spot price. ## What asset types can be involved in cash-and-carry arbitrage? - [ ] Only stocks - [ ] Nothing tangible - [x] Any asset with a spot market and a futures market - [ ] Only cryptocurrency > **Explanation:** Any asset with both a spot and futures market can provide opportunities for cash-and-carry arbitrage.