How Does Arbitrage Link the Spot Price and the Futures Price?

Arbitrageurs ensure the spot and futures prices remain aligned with the theoretical 'cost of carry' model. If the futures price deviates too far from the spot price plus the cost of carry, an arbitrage opportunity arises.

For instance, if the futures price is too high, an arbitrageur will buy the spot, simultaneously sell the future, and hold the asset until expiration for a risk-free profit. This action of buying the spot and selling the future forces the prices back into their theoretical relationship.