Identifier: C3T5L2 · Revision: 2026-10-26 · Classification: domestic

Decision and objectives

Calculate cash-and-carry and reverse-carry net conditions. The decision record must connect the exposure, cash dates and implementable contract, rather than stop at a favorable price forecast.

By the end, you can calculate cash-and-carry and reverse-carry net conditions; include financing, dividends and securities borrowing in the correct direction; reject a theoretical surplus that cannot be funded or borrowed.

Prerequisite: C3T5L1; completed Classes 1 and 2 and the Stock Market School foundation or Forex School foundation. All cases below are hypothetical; their prices, costs, rates, dates, contractual assumptions and collateral amounts are teaching inputs, not current offers.

Mechanics

Cash-and-carry buys the underlying and shorts a relatively expensive future. Reverse carry sells borrowed underlying and buys a relatively cheap future. Replication requires matched units, dates, distributions and delivery or closeout. Reverse carry cannot be implemented simply by inserting a negative share quantity into a spreadsheet; the borrow and short-sale rules from C3T8 apply.

A financial no-arbitrage comparison assumes executable prices and actual financing. Taxes, capital constraints, collateral, custody and operational failures create a band rather than a single universally tradeable fair price.

Price and return drivers

Cash-and-carry surplus uses the combined-equivalent expiry receipt q × F0, not a full-principal payment from a cash-settled future. Under exact expiry convergence, matched underlying units and dates, and an executable underlying sale at ST, the cash asset sale q × ST plus cumulative short-futures settlement q × (F0 − ST) equals q × F0. Deduct cash acquisition, financing, carrying/execution costs and collateral funding, and add actual distributions. Reverse carry combines the underlying buyback q × ST less the long-futures settlement q × (ST − F0), giving effective buyback cost q × F0 under the same assumptions; deduct borrowing and distribution replacements and apply retained-proceeds rules.

Worked case

Hypothetical 1,000 units spot TRY 100; initial short-futures quotation TRY 112; 90/360 simple financing 32%; dividends TRY 1/unit at expiry. Cash principal TRY 100,000, financing TRY 8,000, dividend TRY 1,000. Gross carry surplus = 112,000 − 100,000 − 8,000 + 1,000 = TRY 5,000. Cash/futures fees TRY 600, custody TRY 100 and collateral funding TRY 700 leave TRY 3,600 before tax. For illustration, if expiry ST is TRY 110, selling 1,000 underlying units produces TRY 110,000 and cumulative short-futures settlement is 1,000 × (112 − 110) = TRY 2,000, giving the combined TRY 112,000 receipt. The future itself does not pay TRY 112,000 principal. Daily variation totals TRY 2,000 over the path but can require earlier debits before the asset sale; the separate TRY 700 funding line addresses the supplied collateral cost, not a universal funding ceiling. Futures collateral is separately reserved. If the same future were 103, a hypothetical reverse carry with unrestricted proceeds earning TRY 4,000, borrow TRY 1,500, dividend replacement TRY 1,000 and total other costs TRY 800 gives 100,000 + 4,000 − 103,000 − 1,500 − 1,000 − 800 = −TRY 2,300. At the same ST of TRY 110, reverse-carry buyback costs TRY 110,000 while the long future gains 1,000 × (110 − 103) = TRY 7,000, leaving effective buyback cost TRY 103,000. The aggregate formula does not erase daily settlement or borrow-return cash timing.

Adverse case

Cash-and-carry funding resetting to 48% increases interest to TRY 12,000 and turns the first trade into −TRY 400 net, all else equal. If the short future rises before maturity, variation cash is needed while the cash asset appreciation is unrealized. Reverse carry may lose access to sale proceeds, suffer a recall or face an intervening short-sale restriction, invalidating the assumed interest income and horizon.

Practical use

Secure cash funding and usable borrow before committing both legs. Verify current restrictions, marked sale rules and settlement compatibility. Use bid for sales, ask for purchases and investor-specific borrowing/deposit rates. Include manufactured distributions, capital or collateral funding, spreads, commission, custody, conversion, taxes and termination charges. No example asserts current liquid series or borrow inventory.

Reconcile the confirmation, position register and cash statement separately. Costs include the quoted bid/ask spread, brokerage and clearing charges, collateral or principal financing, currency conversion, custody where relevant, and exit or termination charges. A mark is not a fill. Any amount explicitly excluded below remains outside the reported result. Tax is excluded from these teaching cases: an actual comparison requires income year, investor residence and individual/corporate status, contract and acquisition dates, settlement form and effective law. The GIB guide, checked 2026-10-26, covers 2025 individual investment income, so its publication date alone does not settle a 2026 derivative liability.

Decision boundaries

Trade only when a positive net survives executable adverse assumptions and all obligations are fundable. A negative or tiny reverse-carry surplus is a reason to retain the baseline, not an invitation to omit borrow fees. A restriction or unavailable stock loan prevents implementation even if the theoretical surplus is large.

Practice and references

Exercise: hypothetical cash purchase TRY 50,000, combined expiry receipt from underlying sale plus short-futures settlement TRY 55,000 under exact matched expiry convergence, financing TRY 3,000, distributions TRY 500 and all other costs TRY 1,000. Calculate net carry and stress an additional TRY 2,000 financing cost. Solution: net carry = 55,000 − 50,000 − 3,000 + 500 − 1,000 = TRY 1,500. If financing rises by TRY 2,000, net becomes −TRY 500; the correct response before entry is to decline unless the financing can be fixed on acceptable terms.

Takeaway: Reject a theoretical surplus that cannot be funded or borrowed using the actual cash schedule, with every excluded cost and remaining exposure stated.

Reference card: cash-and-carry. Formula: Cash-and-carry net surplus. Glossary: Cash and carry, Reverse cash and carry. Next lesson: C3T5L3. Topic test.

Sources and verification date (2026-10-26):

Shared reference guide