20 Advantages of Futures Over Forex, Stocks and ETFs

A cash-and-carry trade has several steps. The investor must first purchase a security or commodity. He or she then sells a futures contract for that same security or commodity.

The Future of the Carry Trade as a Forex Strategy

When it does, the investor delivers the commodity or security he previously bought. For example, in the case of a bond , the investor receives the coupon payments from the bond he has bought, plus any investment income earned by investing the coupons , as well as the pre-determined future price at the future delivery date.

In other words, the investor believes the securities are mispriced at the present time, and that he can profit by their eventual correction.

Carry trading: Not just for currencies | Chicago Booth Review

This concept can be transferred to the credit derivatives market, where basis the difference between a commodity's immediate cash price and its futures price represents the difference in spread between credit default swaps CDS and bonds for the same debt issuer and with similar, if not exactly equal, maturities. Here, the strategy is called a negative basis trade. In the credit derivatives market, basis can be positive or negative; a negative basis means that the CDS spread is smaller than the bond spread.

The trade is usually done with bonds that are trading at par or at a discount , and a single-name CDS as opposed to an index CDS of a tenor equal to the maturity of the bond. For details, see Get Positive Results With Negative Basis Trades. Dictionary Term Of The Day.

Carry (investment) - Wikipedia

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