As we dive into another week, let’s continue our discussion on carry trades. So far, we’ve explored the borrowing side in detail, but now it’s time to shine the spotlight on lending, the second integral part of this family.

To recap, borrowing in carry trades involves buying a futures contract for the nearest date while simultaneously selling a contract for the further date. On the flip side, lending is the opposite — you sell the nearest contract and buy the further one. Simply put, in borrowing, you “buy near, sell far,” whereas in lending, you “sell near, buy far.”

Now, let’s paint a scenario. Imagine you’re holding a long position in the March futures market, but you actually need to hold that position in April instead. In this case, you would unwind your March position by selling it and simultaneously buy the April contract. This process of selling near and buying far is what we call lending. It’s that simple.

But what happens in a contango market, where the price for the further date (April) is higher than for the nearer date (March)? This introduces a new dynamic that we’ll unpack next time.

Stay tuned as we dive deeper into the intricacies of lending in carry trades and explore how contango influences these strategies. See you in the next post!