Why Is It Crucial for an Arbitrageur to Accurately Calculate the Transaction Costs When Assessing the Basis?

Accurate calculation of transaction costs is crucial because these costs directly erode the potential arbitrage profit. Transaction costs, including exchange fees, brokerage commissions, and slippage, must be subtracted from the gross basis profit.

If the net profit after accounting for all costs is zero or negative, the apparent arbitrage opportunity is not viable. These costs determine the minimum profitable basis spread required for a trade.