Cost of Carry

Understanding trading jargon is essential for any investor wanting to make informed decisions. Among these terms, "Cost of Carry" is key. So, let's start unearthing this term right away.

Defining 'Cost of Carry'

The Cost of Carry refers to the cost of holding a financial position over a specific period. These costs can include interest payments, storage fees, dividends, or other expenses related to owning a particular asset. It's vital to account for these when calculating the profitability of your investments.

'Cost of Carry' in Context of Trading

In the world of trading, understanding the Cost of Carry is crucial when dealing with derivative contracts such as futures. In a futures contract, the cost of carry helps determine the futures price. Usually, the futures price is equal to the spot price of the asset plus the cost of carry for the term of the contract.

The Mechanics of 'Cost of Carry'

Cost of Carry can affect your trading strategies. For instance, when the cost of carry is higher than the return on investment, the security might not be worth holding and could be sold. Conversely, when the return on investment is higher than the cost of carry, it can be cost-effective to hold onto the security.

Factors Affecting 'Cost of Carry'

The Cost of Carry can be influenced by multiple factors. These can include interest rates, storage and maintenance costs, and anticipated changes in the asset's price. Monitoring these factors can help investors manage their cost of carry.

To Conclude

Understanding the Cost of Carry is a crucial aspect of trading, especially when dealing with futures. By focusing on this concept, one can better assess the profitability of an investment. So, next time you are about to make a trade, don't forget to consider your cost of carry.