Cost of Carry
The net cost of holding the underlying until expiry — the engine behind the futures price.
Definition
Cost of carry is the net cost of holding an underlying asset until a futures contract expires. For equities and indices it is mainly the interest cost of funding the position, reduced by any dividends received in the meantime. For commodities it can also include storage and insurance, offset by a convenience yield. This carry is what makes a future trade away from spot.
Why it matters
Cost of carry is the bridge between spot and futures: it explains the basis, why most markets sit in contango, and why the future converges to spot at expiry as carry runs off. It also sets the fair value used to spot mispricing — if the actual future strays far from spot plus carry, arbitrageurs step in. Understanding carry helps you judge whether a roll is cheap or expensive.
Formula
Fair futures price ≈ Spot × (1 + r × t) − expected dividends, where r is the financing rate and t is the time to expiry in years. The carry component is the part added on top of spot.
Example
With a stock at 1,000, an annual financing rate of 8 percent, about one month to expiry and no dividend, carry is roughly 1,000 × 0.08 × (1/12) ≈ 6.7. The fair near-month future is therefore around 1,007. If a 5-rupee dividend were due, fair value would fall to about 1,002.
See it live
See how carry drives the spot-to-futures gap in real time alongside the live chain on TradePulse.