Thecost of carry orcarrying charge is the cost of holding asecurity or a physicalcommodity over a period of time. The carrying charge includesinsurance, storage andinterest on theinvested funds as well as other incidental costs. In interest ratefutures markets, it refers to the differential between the yield on acash instrument and the cost of the funds necessary to buy the instrument.^[1][2]

If long, the cost of carry is the cost of interest paid on a margin account. Conversely, if short, the cost of carry is the cost of paying dividends, or rather theopportunity cost; the cost of purchasing a particularsecurity rather than an alternative. For most investments, the cost of carry generally refers to the risk-free interest rate that could be earned by investing currency in a theoretically safe investment vehicle such as amoney market account minus any future cash flows that are expected from holding an equivalent instrument with the same risk (generally expressed in percentage terms and called theconvenience yield). Storage costs (generally expressed as a percentage of thespot price) should be added to the cost of carry for physical commodities such as corn, wheat, or gold.

The cost of carry model expresses theforward price (or, as an approximation, thefutures price) as a function of thespot price and the cost of carry.

${\displaystyle F=S{e}^{(r+s-c)t}}$

where

${\displaystyle F}$ is theforward price,

${\displaystyle S}$ is thespot price,

${\displaystyle e}$ is the base of thenatural logarithms,

${\displaystyle r}$ is therisk-free interest rate,

${\displaystyle s}$ is the storage cost,

${\displaystyle c}$ is theconvenience yield, and

${\displaystyle t}$ is the time to delivery of theforward contract (expressed as a fraction of 1 year).

The same model in currency markets is known asinterest rate parity.

For example, a US investor buying a Standard and Poor's 500 e-minifutures contract on theChicago Mercantile Exchange could expect the cost of carry to be the prevailing risk-free interest rate (around 5% as of November, 2007) minus the expected dividends that one could earn from buying each of thestocks in theS&P 500 and receiving anydividends that they might pay, since thee-mini futures contract is a proxy for the underlying stocks in the S&P 500. Since the contract is a futures contract and settles at some forward date, the actual values of the dividends may not yet be known so the cost of carry must be estimated.

• Carry (investment)
• Carrying charge
• Interest rate parity
• Covered interest arbitrage
• Spot-future parity
• Contango
• Demurrage (currency)

• Derivatives (finance)
• Financial economics

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