CosttoCarry

Cost to carry refers to the expenses incurred in holding an asset over a period of time. This concept is widely used in finance, particularly in the context of futures and options trading, but also applies to physical assets.

In financial markets, the cost to carry for a futures contract typically includes the cost of financing the asset (interest paid on borrowed money if applicable), storage costs, insurance, and any dividends or coupons received from the underlying asset. For a long position in a futures contract, these costs are generally added to the spot price to determine the theoretical futures price. Conversely, for a short position, these costs are borne by the seller.

For physical assets like commodities or inventory, the cost to carry includes warehousing fees, insurance premiums, potential spoilage or obsolescence costs, and the opportunity cost of capital tied up in the inventory. Businesses meticulously track these costs to make informed decisions about inventory management and pricing strategies.

The cost to carry plays a crucial role in determining whether it is more advantageous to hold an asset or to enter into a derivative contract. Arbitrage opportunities can arise when the market price of a futures contract deviates significantly from its theoretical price, which is largely dictated by the cost to carry. Understanding and calculating the cost to carry is therefore essential for participants in various financial and commercial activities.