Carry arbitrage

Trading a forward price against spot plus the cost of carrying the asset: if the forward is too high, borrow, buy the asset and sell forward; if too low, the reverse. It pins forward prices to cost of carry.

Where you will meet it

Carry arbitrage appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Explain the carry arbitrage model both when the underlying generates cash flows and when it does not
  CFA Level II · Derivatives and Risk Management

  “If the quoted forward is above this, carry arbitrage: sell the forward, borrow, buy the asset and deliver it.”

• Explain the pricing of fixed-income forwards and futures, and work out their no-arbitrage value and say what it means
  CFA Level II · Derivatives and Risk Management

  “Bond forwards and futures follow carry arbitrage on the full price.”

See also

Cost of carry · Forward price

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

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