The difference between the financing cost of an asset/ investment (e.g., a security) and its cash yield. In other words, cost of carry is calculated as:
Cost of carry = financing cost – current yield
Financing cost constitutes the cost of borrowing to fund the purchase of the asset/ investment in question, while current yield is the profit earned from the asset/ investment.
When financing cost exceeds current yield, negative carry arises:
Negative carry: financing profit > financing cost
In the opposite case, the situation is called positive carry:
Positive carry: financing profit < financing cost
Cost of carry is also known as net financing cost or simply as carry.
