Cash and carry is a trading strategy where an investor purchases an asset and simultaneously sells a futures contract on the same asset. It is typically used in commodity markets, specifically for physical products that can be stored. Investors aim to use this strategy to profit from the difference between the spot price and the futures price, while also earning a return from holding the underlying asset.
An investor believes the price of gold will rise, but they do not want to take on the risk of owning physical gold. They decide to use the cash and carry strategy.
The investor first borrows money from their broker at a low interest rate. They then use the borrowed money to purchase a gold futures contract that will expire in two months. They hold the contract until it expires, and when they receive the delivery of the physical gold, they sell it in the market at the higher market price.
The investor earns a profit, derived from the difference between the low interest rate they paid to borrow the money and the higher market price they received for the physical gold they sold.
The major benefit of this strategy is the potential for investors to profit from the price difference between the cash and futures markets. Investors may also use this strategy to hedge against market risks.
However, this strategy requires a significant amount of capital to implement. Investors must also be able to predict market movements accurately, which can be difficult to achieve consistently.
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