Reverse Cash-and-Carry Strategy

The reverse cash-and-carry strategy is the mirror image of the standard cash-and-carry arbitrage — exploited when a futures contract is trading at a discount to its theoretical fair value (below spot price plus cost of carry). In this strategy: the arbitrageur short sells the underlying asset in the cash market, simultaneously buys the underpriced futures contract, and holds until expiry when futures and spot prices converge, locking in the discount as a risk-free profit. In equity markets, executing a reverse cash-and-carry requires the ability to short sell the underlying stock — which is constrained in most markets by stock availability for borrowing and regulatory restrictions on short selling. In India, the SLBS (Securities Lending and Borrowing Scheme) mechanism at NSE facilitates stock borrowing for short selling, enabling sophisticated participants to execute reverse cash-and-carry when significant futures discounts appear. The strategy is more commonly observed in commodity markets (particularly gold and silver) where physical commodities can be more readily borrowed or where the convenience yield and storage cost dynamics create periods of backwardation — when spot prices exceed futures prices — making the reverse strategy viable for well-capitalised participants with access to physical commodity inventory or lending arrangements with custodians.