The Derivatives-on-Line Pages

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Cost of carry

The cost of carry, $ c$, summarizes the relationship between the futures price and the spot price. It is defined as

   cost of carry$\displaystyle =$interest$\displaystyle +$storage cost$\displaystyle -$income earned.

Therefore the cost of carry would be

$\displaystyle \begin{tabular}{rl} $r$ & for a non-dividend paying stock; \\ $... ...y with storage costs; \\ $r-r_{f}$ & for a currency; and so on. \end{tabular}$

The cost of carry allows one to write the futures price for an investment asset as

$\displaystyle F\left( t,\tau \right) =S\left( t\right) e^{c\left( \tau -t\right) }$,

and for a consumption asset as

$\displaystyle F\left( t,\tau \right) =S\left( t\right) e^{\left( c-y\right) \left( \tau -t\right) }\text{,} $

where $ y$ is the convenience yield, a measure of the benefits from ownership of an asset that are not obtained by the holder of a long futures contract on the asset.

next up previous contents
Next: Futures prices and future Up: Futures and Forwards Previous: Hedging using index futures   Contents
Kyriakos 2003-03-17