Cost of carry

What it costs to hold a physical good until a future date: financing on the capital tied up, plus storage and insurance.

Example

Financing at 5.0% plus storage at 0.6% puts a fair twelve-month futures price at 2,000 x 1.056 = 2,112.00.

Important

It is what sets the shape of a futures curve, and it is what makes a flat price a losing year for a physical holder. Every route pays it - only its form and its size change.

Related terms

• Contango — A futures curve sloping upward, with dated prices above the spot price - the ordinary state of a good that is plentiful and expensive to store.
• Backwardation — A futures curve sloping downward, with dated prices below the spot price - what happens when a good is scarce now and buyers will pay a premium to have it immediately.
• Spot price — The price at which the physical good changes hands today, set by how much of it exists and how much is being used.
• Allocated storage — An arrangement in which specific, identified bars are recorded as belonging to you, as opposed to an unallocated claim on a shared pool of metal.

Lessons that explain it

• The only class here that charges you for holding it — There is no income at all - no coupon, no dividend, no rent. The return is the price change minus the cost of carry, which means a flat price is a loss, and the loss compounds. (10 min)
• The curve, and why a fund can lag the price it tracks — Spot is set by physical supply and demand. Everything dated is set by the cost of carrying the good to that date - and when the curve slopes upward, a fund that holds contracts loses money every time it rolls, even with the price standing perfectly still. (12 min)
• Appraising one exposure: the drivers, the carry and what the product holds — Six checks. Two of them - the curve and what the product actually holds - decide more of a five-year outcome than any view about supply and demand, and both have exact published answers. (13 min)
• Nothing arrives while you wait, and the wrapper sets the tax — Large declines with no income to cushion them, a running charge on an asset that pays nothing, a roll cost that hides inside a price - and in the United States, three wrappers around the same metal taxed three different ways. (12 min)
• Sometimes the only thing that rose, sometimes the thing that fell furthest — It genuinely protects a portfolio in some shocks and genuinely makes them worse in others, and the average of those two behaviours describes neither. That is the honest case, and it is a case for a small deliberate position. (10 min)

All 578 terms in the Investing glossary