The cost of carry is the net cost or benefit of holding an asset over time. It rolls up everything you pay to own or finance the position, then subtracts any cash you earn from it, between now and a future date.
Traders use it to price forwards and futures. In simple terms, fair value for a future equals today’s spot price plus the cost of carry to expiry.
What goes into cost of carry?
Carry is a basket of cash flows that accrue while you hold an asset. The mix depends on what you’re holding and how you fund it. Common components include:
- Financing cost: Interest on the money tied up in the position. If you borrow cash to buy the asset, this is the interest you pay. Even if you use your own cash, there is an opportunity cost that models often treat like an interest rate.
- Income from the asset: Dividends on shares or equity indices, coupons on bonds, staking yield on some digital assets, or rental income on property. This reduces net carry because it offsets financing.
- Storage and insurance: Physical costs for goods such as oil or wheat, plus warehousing and insurance. These add to carry.
- Borrow and repo fees: If you short an asset you may pay to borrow it. In bond and equity markets, repo or stock-borrow fees can be material. These increase carry for a short, or reduce any benefit you get from shorting.
- Convenience yield (commodities): A non-cash benefit of having the physical good available, such as ensuring production runs. It effectively lowers carry because it is a benefit of holding the asset now.
Put together, net cost of carry is roughly: financing + storage + borrow fees minus income and any convenience yield.
How cost of carry sets forward and futures prices
At the heart of carry pricing is a no-arbitrage idea: you should be indifferent between buying the asset today and carrying it to a future date, or agreeing today to buy it in the future via a forward or futures contract. The difference between the forward price and spot is the carry.
In words, a fair forward price equals today’s spot price plus the cost of financing and storing the asset until expiry, then minus the value of cash income you expect to receive in that time. If carry is positive, futures tend to sit above spot. If carry is negative, they tend to sit below.
- Positive carry and contango: When financing and storage outweigh income, the futures curve usually slopes upward. This is common for many storable commodities and for equity indices when interest rates exceed expected dividends.
- Negative carry and backwardation: When income and convenience yield exceed financing and storage, futures can trade below spot.
In foreign exchange, the same idea appears as forward points. The forward rate differs from spot based on the interest rate differential between the two currencies.
Where you’ll encounter it in practice
Equity index futures: Traders watch the gap between the index level and the near-dated future. The gap reflects expected dividends minus the cost of financing. When policy rates such as the base rate are high relative to dividends, the future trades at a premium to the cash index. If dividends dominate, the premium shrinks or flips to a discount.
Commodity futures: For a physical commodity, carry includes storage, insurance and sometimes a convenience yield. Seasonal storage patterns can push futures above or below spot at different times of the year.
FX forwards: The forward points mostly reflect the interest rate gap between the two currencies, since there is no storage and little income to consider. A higher domestic rate tends to put the domestic currency at a forward discount to spot.
CFDs and spread bets: Many providers embed carry in their “overnight funding” or daily roll. With contracts for difference, you’ll often see a financing adjustment based on a reference rate plus or minus a margin, sometimes offset by dividends on equity indices when they go ex-dividend. Exact treatment varies by provider.
Short selling: If you’re short, your carry includes stock-borrow costs and, for equities, payments in lieu of dividends to the lender. These can turn a seemingly cheap short into an expensive position to maintain.
The components in one place
| Component | Typical sign | Applies to |
|---|---|---|
| Financing cost | Cost | All financed positions, long or short |
| Income (dividends, coupons) | Benefit | Shares, equity indices, bonds |
| Storage and insurance | Cost | Physical commodities |
| Borrow or repo fees | Cost | Short positions, special collateral |
| Convenience yield | Benefit | Physical commodities, inventory users |
Quick examples across markets
Equity index future: Say the cash index is 4,000. Holding it for three months has a financing cost equivalent to 1% annualised on the notional, while expected dividends over the same period equal 0.6% annualised. The net carry is roughly +0.4% annualised for three months, so a simple model would price the future modestly above 4,000. If expected dividends rise or rates fall, the premium narrows.
Commodity future with storage: A metals trader holds copper with annual storage and insurance at 2% of value. Financing adds another 3% at prevailing rates. There is no cash income, and convenience yield is small. Net carry is about 5% annualised, so near-dated futures sit above spot unless inventories get tight and convenience yield increases.
FX forward: If domestic rates exceed foreign rates by 1% annualised, the domestic currency tends to trade at a forward discount to spot roughly equal to that differential for the same maturity. That gap is the carry.
Limits, moving parts and common confusions
- Inputs shift: Interest rates, dividend forecasts, storage tariffs and borrow fees change. Futures can move from premium to discount as these inputs evolve.
- Dividends are estimates: Forward pricing for equity indices relies on expected dividend amounts and timing. Surprise cuts or specials can move the basis quickly.
- Borrow specials: Hard-to-borrow stocks or bonds can carry very high borrow fees. Shorts then have strongly negative carry even if prices do not move.
- Carry vs carry trade: Cost of carry is the pricing input described above. A carry trade is a strategy that seeks to earn that carry intentionally, for example by owning high-yielding currencies and funding in low-yielding ones. The two ideas are linked but not the same.
- Provider treatment differs: Retail platforms quote funding and roll adjustments in different ways. Check how your platform handles dividends, corporate actions and holidays, and remember the figures can change without notice.
However you trade, keep an eye on the carry. It explains why a future sits at a premium or discount, why shorting can be costly to maintain, and why forward prices move when rates, storage or income expectations shift.