Carrying Charge

Dictionary Says

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 Says

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.

Articles Of Interest

  1. Using Open Interest To Find Bull/Bear Signals

    Volume should inform your use of this indicator in confirming trends and reversals.
  2. Intro To Open Interest In The Futures Market

    Applied primarily to the futures market, this indicator confirms trends and reversals.
  3. Interpreting Volume For The Futures Market

    Learn how to read the volume reports, look at the relation to liquidity and interpret volume using open interest.
  4. A Primer On The Forex Market

    Moving from equities to currencies requires you to adjust how you interpret quotes, margin, spreads and rollovers.
  5. Futures Fundamentals

    For those who are new to futures but want a solid understanding of them, this tutorial explains what futures contracts are, how they work and why investors use them.
  6. 6 Asset Allocation Strategies That Work

    Your portfolio's asset mix is a key factor in whether it's profitable. Find out how to get this delicate balance right.
  7. Nobel Winners Are Economic Prizes

    Before you try to profit from their theories, you should learn about the creators themselves.
  8. Investing During Uncertainty

    The inability to forecast future events can turn the markets upside down. Find out how to stay right-side up.
  9. An Overview Of Commodities Trading

    Commodities markets, both historically and in modern times, have had tremendous economic impact on nations and people. Investing in commodities can quickly degenerate into gambling or speculation ...
  10. The Copper King: An Empire Built On Manipulation

    Find out how Yasuo Hamanaka's actions in the copper market forever changed the rules for commodity traders.
comments powered by Disqus
Marketplace
Hot Definitions
  1. Racketeering

    Racketeering refers to criminal activity that is performed to benefit an organization such as a crime syndicate. Examples of racketeering activity include...
  2. Lawful Money

    Any form of currency issued by the United States Treasury and not the Federal Reserve System, including gold and silver coins, Treasury notes, and Treasury bonds. Lawful money stands in contrast to fiat money, to which the government assigns value although it has no intrinsic value of its own and is not backed by reserves.
  3. Fast Market Rule

    A rule in the United Kingdom that permits market makers to trade outside quoted ranges, when an exchange determines that market movements are so sharp that quotes cannot be kept current.
  4. Absorption Rate

    The rate at which available homes are sold in a specific real estate market during a given time period.
  5. Yellow Sheets

    A United States bulletin that provides updated bid and ask prices as well as other information on over-the-counter (OTC) corporate bonds...
  6. Bailment

    The contractual transfer of possession of assets or property for a specific objective.
Trading Center