The cost of carry refers to costs incurred as a result of an investment position. These costs can include financial costs, such as the interest costs on bonds, interest expenses on margin accounts , and interest on loans used to purchase a security. They can also include economic costs, such as the opportunity costs associated with taking the initial position. For example, the longer a position is made on margin, the more interest payments will need to be made on the account.
When making an informed investment decision, consideration must be given to all of the potential costs associated with taking that position. In capital markets, the cost of carry is the difference between the yield generated from the security and the cost of entering and maintaining the position.
In the commodities markets, the cost of carry includes the cost of necessary insurances and the expense of storing the physical commodity over a period of time.
There is a financial model that is used in the forwards market to determine the cost of carry if the forward price is known , or the forward price if the cost of carry is known. While this works for forwards, it provides a good approximation for futures prices as well.
The formula is expressed as follows:. This model expresses relationship between the forward price, the spot price and the cost of carry.
The equation would be set up as follows:. Dictionary Term Of The Day. A conflict of interest inherent in any relationship where one party is expected to Broker Reviews Find the best broker for your trading or investing needs See Reviews. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. Cost Of Carry Share.
What is the 'Cost Of Carry' The cost of carry refers to costs incurred as a result of an investment position. The Cost of Carry Model There is a financial model that is used in the forwards market to determine the cost of carry if the forward price is known , or the forward price if the cost of carry is known. The formula is expressed as follows: The equation would be set up as follows: Get Free Newsletters Newsletters.More...