# Cash-and-carry economics

**FUT-12 · Equity Index Futures · Core**

**Lesson question:** When does a theoretical discrepancy survive implementation?

Original fictional examples; educational writing, not live market data, orders or production approval.

## By the end

- Explain the mechanism in the lesson question.
- Reproduce the worked comparison and recognize its failure case.

**Prerequisites:** FUT-01

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.

## Graph: Cash-and-carry economics—worked comparison

**Horizontal:** Implementation disadvantage (points)  
**Vertical:** Net modeled discrepancy (points)

Fictional data from the written example. The chart organizes the comparison; its shape is not a forecast.

Complete numerical data are embedded in `scripts/equity-futures/FUT-12.js` and displayed as an accessible table in the HTML lesson.

## 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

### If gross discrepancy is about 8.65 points and disadvantage is ten, is net edge positive?

**Answer:** No.

**Why:** Implementation costs exceed the modeled gap.

### What is the critical failure to avoid?

**Answer:** Using historical yield as exact future dividends or ignoring basket costs can turn a normal pricing difference into an imaginary arbitrage.

**Why:** Explain this risk before treating the example as a decision rule. A correct calculation does not guarantee a favorable market outcome. **Critical risk check.**

## Takeaway

Return to the question: When does a theoretical discrepancy survive implementation? State the observed facts, the assumptions and the failure condition separately.

## References and provenance

The cited references support definitions and conventions. The teaching prose, tickets and numerical scenarios are original; they are not attributed as historical market observations.

- [CME Calculating Fair Value](https://www.cmegroup.com/trading/equity-index/fairvalue.html)