Carry / Cost of Carry
The net cost of holding a physical commodity position — storage, insurance, and financing minus any income or convenience yield.
F = S × e^(r + u − y)T (r=financing, u=storage, y=convenience yield, T=time to maturity)
Cost of carry is the total expense of holding a physical commodity from today until the futures delivery date. It includes three components: storage costs (warehousing or tanker fees), insurance, and financing costs (the interest cost of having capital tied up in physical inventory).
In a theoretically efficient market, the futures price equals the spot price plus carry: F = S × e^(r+u-y)T, where r is the risk-free rate, u is the storage cost rate, and y is the convenience yield. When carry dominates, the market is in contango. When convenience yield exceeds carry, the market tips into backwardation.
Carry is not static — it changes with interest rates, storage capacity utilization, and seasonal demand cycles.