KostendesCarryModell

The KostendesCarryModell, or Cost-to-Carry Model, is a financial concept used to determine the theoretical price of a derivative asset, such as a futures contract. It accounts for the costs associated with holding the underlying asset until the contract's expiration date. The model is foundational in understanding futures pricing and arbitrage opportunities.

The core components of the KostendesCarryModell include the spot price of the underlying asset, the costs of carrying the asset, and any income generated by the asset. Carrying costs typically encompass storage fees, insurance, and interest expenses incurred from financing the purchase of the asset. Income generated might include dividends for stocks or coupon payments for bonds.

The formula for the forward price (F) derived from the model is generally expressed as F = S * e^((r+u-y)T), where S is the spot price, r is the risk-free interest rate, u represents the costs of carrying the asset (expressed as a percentage), y is the income yield of the asset, and T is the time to expiration.

The KostendesCarryModell assumes no arbitrage opportunities exist in the market. If the market price of a futures contract deviates significantly from the theoretical price calculated by the model, arbitrageurs can profit by simultaneously buying or selling the asset in the spot market and the futures market. This activity, in turn, tends to push the futures price back towards its theoretical value. The model is a simplification and doesn't account for all real-world market imperfections.