Cost of carry is a measure of the relationship between futures prices and spot prices. This cost consists of the storage cost and the interest paid to finance the asset (such as a specific commodity) less the income generated from the asset. For financial assets such as stocks and bonds, the storage cost is non-existent. Assets that generate no income such as non-dividend paying stocks, have a higher cost of carry. The cost of carry for a non-dividend-paying stock is equal to the interest rate over a respective period. Assume r denotes the interest rate, g is the storage cost, and m is the income earned on the asset, then the cost of carry (c) is:
For a commodity c = g + r – m
For a stock c = r – m
For a non-dividend paying stock c = r
For a stock index c = r -q where q is the income earned on the index
For a currency, c = r – rf where rf is the risk-free rate
Based on the cost of carry, the futures price for an investment asset and a consumption asset can be given, respectively, by:
F0 = S0. eCT
F0 = S0. e(C-Y)T
where
T is the investment period
Y is the convenience yield
