October 2012
Intermediate to advanced
716 pages
24h 44m
English
Content preview from CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition
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23.5 COST OF CARRY
The cost of carry is equivalent to the cost of storing a commodity. The major components of the cost of carry include:
- Financing costs. The standard assumption is that storage is fully financed, and that the financing cost is the cost of capital the firm applies to working capital.
- Storage costs. These costs include rental of storage facilities, insurance, inspections, transportation costs, and maintenance costs (e.g., cattle feed).
- Spoilage. This is the loss of value that may naturally occur through storage.
In Exhibit 23.1, if the commodity is needed three months in the future, in theory it would make no difference to the buyers whether they paid $4.25 today in addition to $0.31525 in storage costs or paid a futures price of $4.56525 for delivery in three months' time. For these calculations, we ignore commissions and transaction costs.
EXHIBIT 23.1 Cost of Carry Example
| Monthly Carry Cost | ||
| Spot price per bushel | $4.250 | |
| Storage cost per month | $0.030 | $0.03000 |
| Insurance per month | $0.015 | $0.01500 |
| Spoilage rate per month | 0.50% | $0.02125 |
| Financing rate per month | 0.60% | $0.02550 |
| Total monthly cost per bushel | $0.09175 | |
| Transport to or from storage | $0.020 | |
| Total storage costs for three months | $0.27525 | |
| Transportation cost (round trip) | $0.04000 | |
| Total cost of carry | $0.31525 | |
| Break-even futures price (spot + carry) | $4.56525 |
If the futures ...
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