A futures contract is an agreement between a buyer and a seller to purchase or sell an asset at a predetermined price and date in the future. The terms, such as price and delivery date, are set in advance.
For example, in October 2022, a share of "Lukoil" costs about 4000 rubles. A futures contract for Lukoil shares would mean the buyer agrees to purchase the shares for 4000 rubles in three months. Regardless of the share's actual price at that time, the agreed price remains fixed, causing one party to incur a loss if the market moves unfavorably.
Most futures trades are speculative. If you believe the price will rise, you buy a futures contract. If you think the price will fall, you sell it.
Selling a futures contract is essentially like placing a bet: one party expects the price to rise, while the other predicts it will fall. Importantly, selling futures does not require prior ownership of the underlying asset, as all settlements are handled in cash equivalents.
Spot-Futures Arbitrage (Cash-and-Carry)
Spot-futures arbitrage, or cash-and-carry, is a strategy where a trader takes a long position in an underlying asset (such as a stock or commodity) and simultaneously sells a futures contract on the same asset. This strategy exploits pricing inefficiencies between the spot and futures markets. To be profitable, the futures price must be higher than the spot price of the underlying asset.
Example: If a stock is priced at $100, and the monthly futures contract is priced at $104, the trader buys the stock at $100 and sells the futures contract at $104. When the futures contract expires, the trader delivers the stock and earns a risk-free profit of $4.
However, this strategy has risks. If the spot price unexpectedly rises above the futures price, the trader may incur losses fulfilling the contract obligations.
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