anyone can help me describe it in detail and give a typical example ?? many thanks. I feel quite vague about this.
it is just a way to figure out if an arb exists. the best thing to do would be to figure out the no arb futures price and then compare that to current futures price. example spot 100 and risk free rate %5. one year futures should be 105. now if 1 year futures are 110, you have a arb. cash and carry buy spot , borrow 100@ 5% for a year, sell futures @110. at the end of the year you will get 110 from the futures contract and pay pack the 105 loan. thus you made 5 risk free… this is a simplified version. when calculating the futures price you will have to take into account lease rate, convenience yiled and storage. but the same rules apply… simple calculate the no arb futures price and then compare it to the actual futures price in the market. if these prices are different then you will have a arb… same rules apply. buy low sell high. thus if your calculated no arb price is less than actual futures price… cash and carry arb. or if your calculated price is less than futures price. reverse cash and carry