Explain the Relationship between Cost of Carry and the “Implied Repo Rate” in Arbitrage

The implied repo rate is the rate of return an arbitrageur earns by executing a cash-and-carry trade. It is calculated by rearranging the cost of carry formula to solve for the interest rate that equates the spot and futures prices.

When the implied repo rate is higher than the arbitrageur's actual borrowing cost, a risk-free profit exists. The difference between the two is the arbitrage profit margin.

Arbitrage activity forces the implied repo rate toward the actual borrowing rate.