Cost of Carry, or carrying cost, is the total cost associated with owning a commodity or security. Cost of Carry breaks down into financial costs, storage costs, and opportunity cost.
Financial costs include interest costs on bonds, interest expenses on margin accounts, insurance, and interest on loans used to make an investment.
Storage costs are costs requisite to holding the physical asset; for example, storing oil or wheat at your facility or that of another party.
Cost of carry also includes opportunity cost, or the second-best use of money if you’re short on the underlying commodity. For example, if you generate a 10% yield from one asset, but could have made 12% in another asset with the same risk profile, your return was technically negative.
Thus, note the fundamentals in the following image, and above all keep in mind that Cost of Carry is the total cost associated with holding a commodity or security.
To learn more, consider reading about PADD Districts, the Why WTI and Brent are Crude Oils, and Why There are Price Differences Among Crude Oils, and my Oil & Gas Terms Guide.
