Carrying Charge

AAA

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.

RELATED TERMS
  1. Full Charge

    The event in which the price of a futures contract covers all ...
  2. Futures Contract

    A contractual agreement, generally made on the trading floor ...
  3. Positive Carry

    A strategy of holding two offsetting positions, one of which ...
  4. Surcharge

    A fee or other charge that is added to the cost of a good or ...
  5. Carrying Charge Market

    A futures market where contracts with maturities further into ...
  6. Cash Price

    The actual amount of money that is exchanged when commodities ...
Related Articles
  1. thinkstock|istock
    Options & Futures

    A Primer On The Forex Market

    Moving from equities to currencies requires you to adjust how you interpret quotes, margin, spreads and rollovers.
  2. Options & Futures

    Using Open Interest To Find Bull/Bear Signals

    Volume should inform your use of this indicator in confirming trends and reversals.
  3. Options & Futures

    Intro To Open Interest In The Futures Market

    Applied primarily to the futures market, this indicator confirms trends and reversals.
  4. Options & Futures

    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.
  5. Insurance

    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. Chart Advisor

    Cocoa Prices Setting Up For A Move Lower

    Cocoa prices have been trending lower over the past several months and the recent bearish crossover between the 50-day and 200-day moving averages suggest that the long-term downtrend is gaining ...
  7. VelocityShares 3x Long Crude Oil ETN has the potential for huge returns, but there are several reasons why you might want to steer clear for now.
    Mutual Funds & ETFs

    A Leveraged Oil ETN For The Future (Just Not Now)

    VelocityShares 3x Long Crude Oil ETN has the potential for huge returns, but there are several reasons why you might want to steer clear for now.
  8. Options & Futures

    What are the differences between divergence and convergence?

    Find out what technical analysts mean when they talk about a market experiencing divergence or convergence and how they affect trading strategies.
  9. Options & Futures

    Futures Quotes Explained The "Easy" Way

    If there’s a security whose price fluctuates, there can theoretically be a futures marketplace for it.
  10. Chart Advisor

    Commodities Set Up For A Continued Move Lower

    Commodities have been suffering since late summer, and unfortunately for the bulls it doesn’t appear that the situation is about to change anytime soon.

You May Also Like

Hot Definitions
  1. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  2. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  3. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  4. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  5. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  6. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
Trading Center