Cash-and-carry arbitrage

Jane notices that a contract for a future date costs more than bitcoin she can buy today. Futures are contracts linked to bitcoin’s price. Selling them, or taking a short position, against purchased bitcoin can offset price movements between the two legs. She wants the price gap, rather than simply a rising or falling bitcoin price. But quantity, currency and expiry must match. Arbitrage means exploiting a price difference; the name does not guarantee that a counterparty failure, a widening gap or forced closure cannot change the outcome. [1]

In our own simplified model, Jane borrows 60,000 USD and buys 1 BTC. She sells corresponding futures at 61,500 USD. This opens a short position but does not put the full 61,500 USD into her account as an ordinary sale would. Instead she must provide margin, funds securing her obligations. Assume a hypothetical 10,000 USD from another source. Margin is not automatically an expense or a maximum-loss limit; she may need to add more. Our calculation is linear in dollars, not the specification of one standard CME contract. [1] [2]

If both final prices reach 65,000 USD, bitcoin gains 5,000 USD against its purchase price and futures lose 3,500 USD. The gross result is 1,500 USD. But futures gains and losses affect the account along the way: CME settles them in cash daily as variation margin. This is not a separate additional loss on top of the contract result. If Jane has already paid the corresponding losses along the way, she must not subtract the full 3,500 USD again at the end. Total profit and the timing of cash receipts and payments are different things. [2]

Jane writes down the costs alongside the prices. At a hypothetical annual rate of 6% for 90 days, simple interest on the borrowed 60,000 USD is 887.67 USD: multiply principal by the rate and the fraction 90 / 365. Add another 100 USD in combined model costs, and the gross 1,500 USD becomes 512.33 USD before tax. These are our hypothetical figures, not a current loan offer. An omitted fee, dearer margin financing or worse execution reduces the result further. Repaying principal is not another loss: the bitcoin profit calculation already includes its purchase price. [1]

Imagine an interim point with spot at 70,000 USD and futures at 72,500 USD. The short has lost 11,000 USD, exceeding the assumed initial margin of 10,000 USD. Bitcoin’s increased value in another account is not automatically cash the broker can use. The broker may demand additional funds or close the position; a call may arrive before the initial margin is exhausted. Later price convergence cannot help Jane if she cannot keep the trade open. She therefore tracks the final return separately from cash available along the way. [1] [2]

Even a favorable price gap can run into the loan agreement’s repayment date. A loan due in 30 days does not itself cover futures with a 90-day horizon. Jane would need an extension or replacement financing, known as refinancing. Both its availability and its price may change. The assumed 6% rate is secured for the full 90 days only if financing terms actually provide for that. Otherwise part of the planned result depends on a future agreement, not just prices known today. [1]

Standard CME Bitcoin futures settle a cash difference against the CME CF Bitcoin Reference Rate, or BRR, a reference price. Jane’s bitcoin does not automatically transfer into the contract. She must sell it separately to close the entire trade and obtain funds to repay the loan. Her actual sale price may differ from the benchmark. Matching quantities therefore does not guarantee matching final prices. Custody and the reliability of the broker or exchange also remain relevant: offsetting price exposures do not protect against every operational failure. [3]

A perpetual is a contract without a fixed expiry. Payments between opposing positions, called funding, help keep its price close to spot. On Deribit, positive funding means the holder of the buying position, the long, pays the short; when it is negative, the short pays instead. Today’s receipt cannot be promised for the entire future period. There is also no fixed settlement date as with dated futures. Likewise, rolling means closing an old contract and opening a new one; it does not automatically preserve the original price gap. The new trade has new prices and costs. Jane’s calculation must always reflect what she actually holds. [4] [1]