Let’s say that an opportunity arose where you could buy a warehouse full of copper at a very low price. Also, you find that copper futures for delivery in three years are currently trading at a very high price. You calculate that the cost of purchasing the copper, maintaining the warehouse for three years, and then delivering the copper, is far less than the amount you would receive from selling an equivalent amount of copper futures contracts. You then buy the warehouse and immediately sell one futures contract for every 25,000 lbs of copper.
During the next three years, you keep evaluating the opportunities to reverse your transactions, but always calculate that you will make more by continuing to hold the short futures contracts and the copper. You thus end up in the arb for three years.
This is a nice concrete example with tangible goods.
Commodities futures contracts are a very tangible example, but my understanding is that the pattern is much more general. Most futures arbitrage trades made by large multinationals are fundamentally these sorts of storage cost arbitrage and/or funding cost arbitrage. (Funding cost can be thought of as a storage cost for money/debt.)
For instance, my understanding is that trading stock index futures vs. a replicating basket of single-stock futures is usually a matter of finding ways to secure funding more cheaply than your competitors. In this case, your competitive advantage is fundamentally linked to time, and exiting early reduces your competitive advantage.
I have no idea what some of the replies are about here. Lots of pure arbs don't close because they are driven by regulation or liquidity. The most well-known example is long bonds in the UK in the late 90s but linkers in 2008 were another, there are lots of examples (a lot of the current examples are related to linkers due to QE).
