Cash and carry: learn more about this
In the investment market, cash and carry is a well-known and consolidated arbitrage strategy in the country, with strong attractions for those who do not wish to take many risks.
This is the concept we will address in this article.
By continuing to read, you will understand how the cash & carry strategy works and learn the steps needed to implement it.
What is cash & carry?
In the financial market, cash & carry or cash and carry is an arbitrage strategy used to obtain profit through the purchase or sale of an asset in the spot market and, simultaneously, another opposite operation in the futures market.
In short, the investor is both a buyer and a seller.
The profit is obtained from the difference between the amount paid in cash and that stipulated in the futures market, provided, obviously, that the latter is greater than the former.
Typically, these operations involve commodities – such as corn and soybeans, for example – and occur when it is believed that the price charged for them at the time of purchase or sale is not adequate and that these prices may rise within a given period.
When to do cash & carry
The cash & carry strategy is justified when the sales value in the futures market exceeds the price in the spot market, plus operating costs.
This value is fixed in the contract and remains immobilized, making the operation similar to a fixed income investment.
As the price of the commodity is already known in advance in the future, the risk of losing the invested amount drops considerably.
There is also an option which is reverse cash & carry.
In this case, there is a combination of a short position in a stock or index with a long position in the futures market.
The strategy works if the intention is to sell a more expensive asset in the current market to acquire it at lower prices in the future.
How cash and carry works
For this topic, we will present an example of how a cash & carry trade might occur.
In this case, the merchandise involved is the barrow of fattened cattle.
For example: in the spot market, it is traded at a hypothetical value of R$100.
In the futures market, with maturity in 90 days, this value rises to R$110.
In this case, the investor would carry out both operations together in order to make a profit. This is cash and carry in practice.
If operating expenses are R$4, at the end of 90 days, the difference would be R$6, and that would be your profit.
Cash & carry and the concept of arbitrage
Within the financial market, cash & carry operations are part of a strategy known as arbitrage.
Basically, arbitrage occurs when a negotiation is made involving the purchase and sale of an asset, with the expectation and profit on the difference in this price in the current market and in the future.
It can occur not only for commodities or other assets, but also with stocks.
Arbitration takes place in three ways:
- Foreign exchange : is an operation involving the exchange of currency in different financial markets. The goal is to make a profit from the difference in the prices of these currencies in short time intervals.
- From stock exchange to stock exchange : in this case, the arbitrage operation occurs when there is the purchase and sale of the same financial asset also on two stock exchanges, seeking the same difference in prices.
- Spot versus forward : here, the profit will be obtained from the difference between the spot price of an asset and the value of that same asset on the futures market.
How to use the cash and carry strategy
As we have seen so far, the cash and carry strategy is a safer and more attractive way of operating.
The risks are lower than in other financial applications, but you need to be aware of market opportunities, which are not constant.
The computerization of negotiations means that futures market prices are adjusted more quickly and efficiently.
In this way, opportunities for cash & carry operations arise very quickly and, as a result, the chances of carrying out a process with large profits decrease.
Now that you have more information about this strategy, analyze the advantages and disadvantages of this operation and check if it can fit your investor profile and meet your profit goals.