Cash and Carry
Learn how crypto cash-and-carry trades hedge spot with futures, convert basis into annualised return and manage margin, counterparty, borrow and convergence risk.
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Cash and carry seeks to earn a positive futures basis by buying the underlying asset and selling an equivalent futures position, reducing outright directional exposure while waiting for convergence.
Learning objectives
- Define futures basis and calculate simple annualised basis.
- Construct a delta-hedged spot-long/futures-short position.
- Identify convergence, margin and counterparty risks that remain.
What it is
When a dated futures contract trades above spot, the market is in contango. A classic cash-and-carry trade buys spot and shorts the overpriced future in matched quantity.
At expiry, a correctly specified futures price converges to the settlement/index mechanism. The gross spread can therefore be locked in conceptually if the trader can hold both legs to settlement and all operational assumptions hold.
How it works
The hedge ratio must reflect contract specifications. Inverse, linear and quanto contracts have different P&L behaviour and collateral currencies.
Basis is usually quoted as a percentage of spot and annualised for comparison. Annualising a short-dated basis does not mean the same opportunity can be repeated at that rate all year.
Margin is path-dependent. Even if final convergence is profitable, futures mark-to-market can demand collateral during interim basis widening or spot moves depending on collateral design.
Counterparty concentration matters if both spot and futures are held on one exchange; splitting venues reduces one risk but adds transfer and settlement complexity.
How to analyse and apply it
| Check | Why it matters | What to verify |
|---|---|---|
| Contract type | Determines hedge and collateral behaviour. | Verify multiplier, quote, settlement and margin currency. |
| Net basis | Gross spread can be consumed by friction. | Subtract fees, spread, borrow, custody and funding/financing. |
| Margin path | Can force exit before convergence. | Stress basis widening and collateral value changes. |
| Settlement/index | Determines final convergence. | Understand expiry time and reference index. |
A strategy is not complete until the signal, sizing, execution, invalidation and review process are explicit. Any discretionary override should be recorded so it can be separated from the tested rule set.
Worked example and thought exercise
BTC spot is £50,000 and a 90-day future is £51,500. Gross basis is 3%. Buying 1 BTC and shorting one equivalent future creates a £1,500 gross convergence spread if held successfully to expiry.
If round-trip trading and financing costs total £450, net spread falls to £1,050, or 2.1% over 90 days. A 12.2% gross annualised headline becomes about 8.5% simple annualised net before taxes and unexpected costs.
Thought exercise: how could a profitable-at-expiry trade still be liquidated halfway through?
Common mistakes and practical workflow
- Calling the trade risk-free because delta is hedged.
- Using an incorrect contract multiplier or collateral assumption.
- Comparing gross annualised basis without subtracting costs.
- Underfunding margin because convergence is expected eventually.
Practical workflow
- Verify contract and settlement mechanics.
- Calculate matched spot/futures quantities.
- Compute net basis after all predictable friction.
- Stress interim basis and collateral moves.
- Set margin buffers and counterparty limits before entry.
✅ Knowledge checkpoint
- What is the basic cash-and-carry position?
- Why does dated futures basis tend to converge at expiry?
- Why can annualised basis overstate achievable yearly return?
- What risk can force closure even if final convergence is favourable?
FAQs
❓ Is cash and carry arbitrage?
It is a relative-value/convergence trade and can approximate arbitrage when all legs and settlement are secure, but real-world risks remain.
❓ Can I use perpetual futures?
Perpetuals do not have a fixed expiry; hedged spot/perp trades depend on variable funding rather than deterministic expiry convergence.
❓ What happens if futures trade below spot?
That is backwardation; a reverse cash-and-carry may be conceptually possible but often requires borrowing/shorting spot.
❓ Why does collateral currency matter?
If margin collateral moves with the underlying, effective leverage and liquidation behaviour can change even in a hedged position.
📋 Summary
Cash and carry monetises futures basis rather than directional price. Its quality depends on contract matching, net rather than gross carry, resilient margin funding and the ability to survive operational and counterparty problems until convergence.
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