Cost of Carry
Cost of Carry
The net annual cost of holding an asset until delivery: the financing rate plus storage costs, less any convenience yield (the benefit of having the physical asset on hand). The futures price is the spot price grown at this rate.
When to use: Use for commodities, where storage and convenience yield matter. A negative cost of carry (convenience yield above financing plus storage) is the signature of a market in backwardation, with futures below spot.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| Carry | Cost of Carry | Net annual carrying rate, as a decimal | % |
| Rf | Risk-Free Rate | Continuously compounded annual risk-free rate as a decimal | % |
| StorageCost | Storage Cost | Annual storage and insurance cost as a fraction of the asset price | % |
| ConvenienceYield | Convenience Yield | Annual benefit of holding the physical asset, as a decimal | % |
Real-Life Examples
Example 1: Stored Commodity
Financing at 5%, storage 2% a year, convenience yield 1%.
Given
Step-by-Step
Holding the commodity costs 6% a year net, so futures trade above spot by that rate: contango.
Example 2: Tight Physical Market
Financing at 3%, no storage cost, convenience yield 4%.
Given
Step-by-Step
A negative carry: having the physical commodity is worth more than it costs to hold, so futures trade below spot. This is backwardation, typical when supply is tight.
Frequently Asked Questions
The value of being able to use or sell the physical asset immediately: a refiner with crude in its tanks keeps running when the market is short. It is inferred from futures prices rather than observed directly.