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For example, a US investor buying a Standard and Poor's 500 e-mini futures contract on the Chicago 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 the stocks in the S&P 500 and receiving any ...
The carry of an asset is the return obtained from holding it (if positive), or the cost of holding it (if negative) (see also Cost of carry). [1] For instance, commodities are usually negative carry assets, as they incur storage costs or may suffer from depreciation. (Imagine corn or wheat sitting in a silo somewhere, not being sold or eaten.)
[1] [2] It is an adjustment to the cost of carry in the non-arbitrage pricing formula for forward prices in markets with trading constraints. Let F t , T {\displaystyle F_{t,T}} be the forward price of an asset with initial price S t {\displaystyle S_{t}} and maturity T {\displaystyle T} .
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The sum of the inflows in 1.' and 2.' equals , (), which by hypothesis, is positive. This is an arbitrage profit. Consequently, and assuming that the non-arbitrage condition holds, we have a contradiction. This is called a cash and carry arbitrage because you "carry" the asset until maturity.
The forward price (or sometimes forward rate) is the agreed upon price of an asset in a forward contract. [1] [2] Using the rational pricing assumption, for a forward contract on an underlying asset that is tradeable, the forward price can be expressed in terms of the spot price and any dividends.
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Contango is normal for a nonperishable commodity that has a cost of carry. Such costs include warehousing fees and interest forgone on money tied up (or the time value of money, etc.), less income from leasing out the commodity if possible (e.g., gold). [7] For perishable commodities, price differences between near and far delivery are not a ...