Carrying Charge

Definition of 'Carrying Charge'


Cost associated with storing a physical commodity or holding a financial instrument over a defined period of time. Carrying charges include insurance, storage costs, interest charges on borrowed funds, and other related costs. As carrying costs can erode the overall return on an investment, due consideration should be given to them in considering the suitability of the investment, and also while evaluating investment alternatives.

May also be referred to as cost of carry.

Investopedia explains 'Carrying Charge'


Carrying costs can be a deterrent for retail investors who wish to invest in physical commodities, since storage and insurance costs can be quite significant and a burden to navigate. Such investors may be better served by commodity exchange-traded funds, which have surged in popularity in recent years.

Carrying charges are generally incorporated into the price of a commodity futures or forward contract. Under normal market conditions, therefore, the price of a commodity for delivery in the future should equal its spot price plus the carrying charge. If this equation does not hold, due to abnormal market conditions or some other development, a potential arbitrage opportunity may exist.

For example, assume that the spot price for a commodity is $50 per unit, and the one-month carrying charge associated with it is $2, while the one-month futures price is $55. An arbitrageur could pocket a riskless profit of $3 per unit in this case by buying the commodity at the spot price (and storing it for a month for $2) while simultaneously selling it for delivery in a month at the one-month futures price of $55.



comments powered by Disqus
Hot Definitions
  1. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to sales or total asset figures.
  2. Oil Reserves

    An estimate of the amount of crude oil located in a particular economic region. Oil reserves must have the potential of being extracted under current technological constraints. For example, if oil pools are located at unattainable depths, they would not be considered part of the nation's reserves.
  3. Joint Venture - JV

    A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it.
  4. Aggregate Risk

    The exposure of a bank, financial institution, or any type of major investor to foreign exchange contracts - both spot and forward - from a single counterparty or client. Aggregate risk in forex may also be defined as the total exposure of an entity to changes or fluctuations in currency rates.
  5. Organic Growth

    The growth rate that a company can achieve by increasing output and enhancing sales. This excludes any profits or growth acquired from takeovers, acquisitions or mergers. Takeovers, acquisitions and mergers do not bring about profits generated within the company, and are therefore not considered organic.
  6. Family Limited Partnership - FLP

    A type of partnership designed to centralize family business or investment accounts. FLPs pool together a family's assets into one single family-owned business partnership that family members own shares of. FLPs are frequently used as an estate tax minimization strategy, as shares in the FLP can be transferred between generations, at lower taxation rates than would be applied to the partnership's holdings.
Trading Center