What is the meaning of Cost of Carry?

Cost of Carry refers to the difference between the actual cost of an asset and the returns it generates over a particular period of time in capital markets. It is also said to be the cost of holding a position.  It is used for pricing of futures contracts and is also referred to as the difference between the interest made on a cash asset and the cost of funds used to finance the instrument.

It is also the cost of holding a particular asset in its physical form in the commodity markets. Latter also includes insurance payments. Whereas in the derivatives market, it stands for interest expenses on margin accounts i.e. the cost on an underlying security till the futures contract expires. This also involves the opportunity costs which are often attached to the initial position.  In theory, the true price of the futures contract is arrived at by adding the prevailing spot price and the cost of carry.

 

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