Cash-and-carry arbitrage
A systematic indexes approach—Cash-and-carry arbitrage—defined by explicit rules, testable on history, and fragile when costs or regimes change.
Overview
“index arbitrage”) aims to exploit price inefficiencies between the index spot 107 price and index futures price. 108 Theoretically, the price of the index futures must equal the spot price accounting for the cost of carry during the life of the futures contract: F∗(t,T ) = exp (r (T−t)) (421) Here: F∗(t,T ) is the theoretical (“fair”) price, at time t, of the futures contract with the delivery time T ; S(t) is the spot value at time t; D(t,T ) is the sum of (discounted values of) the dividends paid by the underlying stocks between the time t and delivery; andr is the risk-free rate, which for the sake of simplicity is assumed to be constant from t to delivery The basis is defined as B(t,T ) = F (t,T )−F∗(t,T ) S(t) (422) where F (t,T ) is the current price of the futures contract with the delivery time T .
Cash-and-carry arbitrage sits in the Indexes chapter of the systematic catalog. On QUSXFI we treat it as a testable hypothesis: specify entries, exits, sizing, and costs—then ask whether edge survives out-of-sample scrutiny.
Discretionary traders often arrive at similar ideas intuitively; the quantitative version forces you to write the rule before you see the next bar. That discipline is what makes results reproducible—or exposes them as luck.
Based on the research catalog 151 Trading Strategies (Kakushadze & Serur, 2018), section 6.2. Educational summary—not a replication of the full formal definition.
How the Strategy Works
Cash-and-carry arbitrage in Indexes is defined by explicit positions and transition rules—translate each clause into code or a checklist.
The published definition of Cash-and-carry arbitrage (catalog §6.2) specifies when exposure changes; discretionary overrides invalidate systematic claims.
Implementation and Research Process
For §6.2 Cash-and-carry arbitrage, write the rule set so another researcher could replicate without you in the room.
Document Cash-and-carry arbitrage capacity in Indexes: intended participation versus average daily volume.
Anchor Cash-and-carry arbitrage research to the catalog definition, then stress every assumption the textbook silently skips.
Risk: What Breaks This Strategy
Carry in Cash-and-carry arbitrage earns slowly and loses quickly when the funding leg inverts or the spread blows out.
Crowded carry unwinds synchronously—liquidity disappears on the exit side first.
Leverage turns a stable historical carry series into a margin-call candidate in one week.
Common Mistakes to Avoid
- Stacking Cash-and-carry arbitrage with correlated sidebar strategies without netting exposures.
- Erasing losing Cash-and-carry arbitrage months instead of documenting regime breaks—that is how research firms stop learning.
- Deploying Cash-and-carry arbitrage live before paper trading through at least one adverse Indexes month.
- Changing Cash-and-carry arbitrage parameters after each losing week—implicit discretion destroys reproducibility.
How to Study This Strategy
- Run a paper book on Cash-and-carry arbitrage for a full signal cycle; export trades and tag regimes manually.
- Compare Cash-and-carry arbitrage to one sidebar alternative net of costs—document why you chose this structure.
- Write a one-page Cash-and-carry arbitrage failure memo: three break modes and early warning signs.
- Restate Cash-and-carry arbitrage (§6.2) as numbered rules another researcher could implement cold.
- List every data field Cash-and-carry arbitrage needs in Indexes; verify point-in-time integrity.
Key Takeaways
- Cash-and-carry arbitrage in Indexes is a testable rule set—a systematic indexes approach—cash-and-carry arbitrage—defined by explicit rules, testable on history, and fragile when costs or regimes change.
- Translate every clause of Cash-and-carry arbitrage into code or a checklist; judgment steps are not yet quantitative.
- Regime tags beside Cash-and-carry arbitrage performance prevent hindsight labeling of luck as skill.
- Stacking Cash-and-carry arbitrage with correlated sidebar strategies without netting exposures.
- Kill switches for Cash-and-carry arbitrage should be written before the first parameter tweak.
Learning Tip
File a dated note after each Cash-and-carry arbitrage paper session: what worked, what broke, what you will not override next time.
Explore related strategies in the sidebar or return to the full catalog.