Enter Values
Cost of Carry Components
- Benefits (γ): Dividends, coupons, convenience yield - reduces forward price
- Costs (θ): Storage, insurance, spoilage - increases forward price
- Net Carry: (S₀ - γ + θ) is the adjusted spot basis
- Compounding: (1+r)^T accounts for financing costs
Forward Price Results
Formula Breakdown
Cost of Carry Interpretation
| Scenario | Effect on Forward | Typical Assets |
|---|---|---|
| High Benefits (γ > θ) | Lower Forward | Dividend stocks, bonds |
| High Costs (θ > γ) | Higher Forward | Commodities, precious metals |
| No Carry (γ = θ = 0) | Basic F = S(1+r)^T | Non-dividend stocks |
| Convenience Yield | Backwardation | Oil, agricultural goods |
Understanding the Cost of Carry Model
What is Cost of Carry?
Cost of carry is the total cost of holding a physical asset or financial position over time. It includes all costs and benefits associated with ownership until the forward contract matures. The full cost of carry model adjusts the basic forward pricing formula to account for these factors.
Cost of Carry Components
Benefits (γ) - Reduces Forward
Income from holding: Dividends (stocks), Coupons (bonds), Convenience Yield (commodities). Spot holder receives these while forward holder does not.
Costs (θ) - Increases Forward
Expenses of holding: Storage (warehousing), Insurance (protection), Spoilage (perishables). Spot holder pays these, forward holder avoids them.
Arbitrage Relationship
The cost of carry model ensures no-arbitrage pricing. If the forward price differs from (S₀ - γ + θ)(1+r)T, traders can profit through:
- Cash-and-Carry: Buy spot, sell forward if forward is too high
- Reverse Cash-and-Carry: Sell spot, buy forward if forward is too low
Frequently Asked Questions
Disclaimer
This calculator is for educational purposes only. Forward prices depend on accurate estimates of benefits, costs, and rates. Actual market prices may differ due to liquidity, transaction costs, and market conditions. Consult a qualified professional for investment decisions.
