How Is the “Cost of Carry” Related to the Profitability of Futures Arbitrage?

The cost of carry is the net cost of holding an asset, including financing costs (interest) and storage costs, minus any income generated (e.g. dividends). In futures arbitrage, the theoretical futures price is determined by the spot price plus the cost of carry.

Arbitrage profits exist when the actual futures price deviates from this theoretical price. High or unpredictable costs of carry reduce the profitability of the arbitrage.