Cost of Carry
The net cost of holding the underlying until a derivative's expiry, comprising financing cost less any income received.
Formula
Futures Fair Value = Spot x (1 + Risk-Free Rate x Days to Expiry / 365) - Dividends Expected before Expiry
Unit
%
In depth
Cost of carry explains why a futures price differs from the spot price without anyone forecasting anything: buying the underlying today requires funding, so a futures buyer who defers payment must compensate for that financing. Dividends work the other way, since a spot holder receives them and a futures holder does not, which is why futures on a high-dividend stock can trade below spot before an ex-date. For commodities, storage and insurance add to the cost while a convenience yield subtracts from it. The observed gap between futures and spot is the basis, and it converges to zero at expiry by construction.
Worked example
Spot 24,000 with 30 days to expiry at a 7% rate gives a fair value of 24,000 x (1 + 0.07 x 30 / 365) = 24,000 x 1.005753 = 24,138. The 138-point premium is financing, not a forecast of a rise.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Cost of Carry” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.