What is Reverse Cash and Carry Arbitrage?

Last Updated: 1 Oct 2025

Arbitrage has always been a significant factor in the financial markets. It assists in keeping balanced prices related to associated assets, and it allows traders to make regular returns. Among the different strategies, reverse cash and carry arbitrage plays a crucial role because it works when futures prices fall below spot prices. Knowing about how this mechanism works can give you better market insights and trading opportunities.

What is Arbitrage?

Arbitrage simply means taking advantage of the price difference of the same assets in two markets. By doing so, you (as a trader) can acquire the asset in a specific market and sell it in a different market to achieve a profit from the variation. In efficient markets, such price gaps can be quickly corrected through arbitrage activities to balance supply and demand.

What is Reverse Cash and Carry Arbitrage?

The reverse cash and carry arbitrage meaning is tied to situations where the futures price of an asset trades below its spot price. In this scenario, the proceeds of the spot sale may be invested in a risk-free investment. At the expiry of the futures contract, the trader gets the asset at the lower price; this ensures a risk-free profit on the difference between the prices.

How Does Reverse Cash and Carry Arbitrage Work?

The working principle of reverse cash and carry arbitrage can be broken down into three steps. Here they are as follows:

• Selling in the spot market: Traders offload the asset at its current, higher market price.
• Investing the proceeds: The reverse arbitrage cash received is typically invested in short-term instruments that earn a modest return.
• Buying futures: Simultaneously, traders buy a futures contract for the same asset at its lower price. When the contract matures, the asset is delivered back through the futures position.

Example of Reverse Cash and Carry Arbitrage

Assume that the current value of a share in the market is ₹1050, and the future value of the share in a period of 1 month is ₹1020. A trader buys the stock at the spot market at ₹1050 and invests that in a short-term instrument. Meanwhile, the trader purchases the futures contract at ₹1,020.

At the expiration of the futures contract, the trader will get the stock via the futures positions of the month. The effective gain is the difference between the ₹30 plus the interest earned on the 1,050 investment. The profit will remain secured even when there is an increase or decrease in the general market within the particular month. Thus, this setup illustrates a reverse cash and carry arbitrage example, where the trader locks in a profit by combining the spot purchase with a long futures position.

When is Reverse Cash and Carry Arbitrage Used?

The approach is employed when there is a discount of futures trade to the spot market. It may happen near dividend payments, market pessimism or transitory liquidity issues. For example, when the investors expect a dividend to be paid on a stock in the near future, the futures price can move down to show that the stock will not yield. The arbitrageurs intervene during these periods and earn profits and ensure the two markets remain on the same track.

Benefits of Reverse Cash and Carry Arbitrage

Besides offering a structured way to profit when futures trade below spot prices, this strategy carries several additional advantages. Some of them are as follows:

• Provides the means to get profits that are low-risk
• It helps to rectify the inefficiencies between the spot and futures markets
• Gives traders protection against the fluctuations in prices
• Traders can re-invest in less volatile instruments
• Introduces liquidity in the spot and futures markets

Difference Between Cash and Carry vs. Reverse Cash and Carry Arbitrage

While both cash and carry as well as reverse cash and carry arbitrage rely on price differences between spot and future markets, they operate in different conditions. The table below highlights the key distinction between the approaches:

Aspect	Cash and Carry Arbitrage	Reverse Cash and Carry Arbitrage
Price relation	Futures price above spot	Futures price below spot
Spot action	Buy in spot market	Sell in spot market
Futures action	Sell futures	Buy futures
Purpose	Exploit futures premium	Exploit the futures discount
Cash flow	Funds locked in asset purchase	Funds released for investment

Conclusion

Reverse cash and carry arbitrage is a structured way to profit when futures prices dip below the spot market. Traders can secure steady returns with minimal risk by selling in the spot market, investing the proceeds and buying back through the futures contract. While such investment options are usually active for a shorter duration, they highlight how arbitrage benefits traders and ensures the market stays fair and efficient.

Frequently Asked Questions

1. When to use reverse cash and carry in trading stocks or commodities?

It is used especially where it is possible to observe a discount on the next trade on trading at a spot price. The opportunities are commonly created by occurrences such as expected dividends, short-term market pessimism or liquidity imbalances.

2. What type of assets can be used for this strategy?

For such arbitrage investments, you can use stocks, stock indices, and commodities that have active futures markets. However, the primary requirement is sufficient liquidity in both spot and futures segments.

3. Is reverse cash and carry arbitrage suitable for short-term or long-term trades?

Short-term strategies are commonly recommended because this strategy highly relies on the expiry of near-month futures. Meanwhile, long-term contracts carry higher uncertainty and lower liquidity.

4. Are there any restrictions on the types of stocks suitable for this strategy?

High liquid stocks with active future contracts ideals. However, stocks with low trading volume or volatile price behaviour may make execution difficult and reduce returns.