If gross discrepancy is about 8.65 points and disadvantage is ten, is net edge positive?
Reveal the worked answer
No.
Implementation costs exceed the modeled gap.
Equity Index Futures · FUT-12 · Core
Cash-and-carry economics
When does a theoretical discrepancy survive implementation?
What you will learn and prerequisites
- Explain the mechanism in the lesson question.
- Reproduce the worked comparison and recognize its failure case.
Read first: What is an equity index future?
Cash-and-carry compares buying and financing a basket with selling its future. Reverse structures use the opposite relationship. These incentives help connect venues, but their classroom arithmetic is simpler than an executable trade.
A theoretical spread is not automatically available profit for every account.
Understand the mechanism
If futures are expensive relative to a feasible financed basket, a participant may buy the basket and sell futures. Funding, expected dividends, borrow, tracking, settlement and execution determine whether the comparison is favorable.
Different participants have different financing and access. A small gross discrepancy can vanish across stock fills or changing futures quotes.
Walk through the process
Calculate consistent fair value, then subtract implementation costs and stress uncertain inputs. Confirm dates and basket weights. Do not call an American-option or proxy implementation riskless merely because a terminal identity looks fixed.
For most learners the important idea is linkage, not an invitation to execute institutional arbitrage.
Operational boundary
All prices, portfolio values and account balances are fictional. Real contract calendars, broker requirements and available liquidity must be checked for the instrument actually traded. The example's mathematical hedge or payoff is not an execution guarantee.
A worked example
With the prior model F=5031.347860, suppose a fictional future quotes 5,040. Gross discrepancy is 8.652140 points, or $432.61 per 50-dollar-point equivalent.
If all-in disadvantage is ten points, it exceeds the roughly 8.65-point gross opportunity. The graph subtracts different cost assumptions to expose that threshold.
Cash-and-carry economics—worked comparison
Vertical: Net modeled discrepancy (points)
Horizontal: Implementation disadvantage (points)
1. Fictional example
Read the graph as a data table
| Implementation disadvantage (points) | Fictional example |
|---|---|
| 0 | 8.65214 |
| 2 | 6.65214 |
| 4 | 4.65214 |
| 6 | 2.65214 |
| 8 | 0.65214 |
| 10 | -1.34786 |
| 12 | -3.34786 |
What would invalidate the reading?
Using historical yield as exact future dividends or ignoring basket costs can turn a normal pricing difference into an imaginary arbitrage.
Check your understanding
Try the question before revealing its answer. These are reading checks, not trading certification or a site completion record.
What is the critical failure to avoid?
Reveal the worked answer
Using historical yield as exact future dividends or ignoring basket costs can turn a normal pricing difference into an imaginary arbitrage.
Explain this risk before treating the example as a decision rule. A correct calculation does not guarantee a favorable market outcome.
Return to the question: When does a theoretical discrepancy survive implementation? State the observed facts, the assumptions and the failure condition separately.
Sources, assumptions and downloadable script
External references support definitions and conventions. Worked scenarios and prose are original. No current quotes or dealer inventory are claimed.
Read this lesson as Markdown · Download its JavaScript content module