What is 'Carrying Charge Market'

Carrying charge market is a futures market where contracts with maturities further into the future have higher future prices relative to current spot prices. The name comes from the fact that these higher future prices are associated with increased carrying charges, such as interest, insurance and storage for holding the commodities for a longer period of time. Because a carrying charge market incorporates the full cost to carry a commodity, it is also called a "full carry market."

BREAKING DOWN 'Carrying Charge Market'

Carrying charge market prices generally increase in correlation to the duration of the contracts involved.

Futures contracts offering lower prices for short-term trading can represent in indicator of a carrying charge market. This indication can be confirmed by comparing those prices to the increased prices for a similar contract whose only difference is a longer term to the expiration date.

For a specific contract in a carrying charge market, the contract price will eventually move closer to the spot price. This happens as time passes and the expiration dates near for these contracts that originally involved a longer term.

Carrying charge market and unexpected fluctuations

Under normal circumstances, a carrying charge market means you could calculate future prices by starting with the near month futures and adding the carrying charge. Still, it is important to remember that prices of any given commodity can fluctuate depending on supply. Shortages or other unexpected situations that drastically impact supply can in turn affect spot prices. If the underlying situation causing the shortage is resolved fairly quickly, the impact on prices may be confined to a limited time. This explains why there are cases where the spot price may be high in comparison to the future price.

A carrying charge market can represent the fluctuations seen as a result of these types of situations. For example, if it costs $1 a month to insure and store a half bushel of corn, and the spot price is $6 per half bushel, a contract for a half bushel of corn that matures in three months should cost $9 in a carrying charge market. However, when a commodity is in low supply, spot prices might be higher than future prices. This higher price helps to ration the limited supply. In this scenario, you could have what is commonly referred to as an inverted futures curve, as known as an inverted market, because it doesn’t follow the usual trajectory where the expected future price would be more, but the spot price and future price would eventually converge.

  1. Carrying Charge

    A Carrying Charge is the cost associated with storing a physical ...
  2. Full Carry

    Full carry occurs when when the later delivery futures contract ...
  3. Spot Commodity

    A spot commodity is any commodity available for immediate trade, ...
  4. Narrow Basis

    Narrow basis refers to the convergence of the spot price and ...
  5. Backwardation

    Backwardation is when futures prices are below the expected spot ...
  6. Spot Rate

    Spot rate is the price quoted for immediate settlement on a commodity, ...
Related Articles
  1. Trading

    Contango vs. Normal Backwardation

    Learn about the futures curve, contango and backwardation, and what they mean for hedgers and speculators.
  2. Trading

    Futures Fundamentals

    This tutorial explains what futures contracts are, how they work and why investors use them.
  3. Investing

    What is a Forward Contract?

    A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.
  4. Trading

    Forward Contracts: The Foundation Of All Derivatives

    An investor can assess interest rate parity and implement covered interest arbitrage by using a currency forward contract to generate risk-free returns.
  5. Investing

    A Quick Guide for Futures Quotes

    Here is a quick guide for reading and understanding futures markets quotes.
  6. Tech

    Price Difference In Bitcoin Futures and Spot Markets Presents Arbitrage Opportunity

    Traders can make easy money by arbitraging the price difference in bitcoin futures contracts and spot market prices.
  7. Investing

    Grow Your Finances in the Grain Markets

    Hedging with futures can protect buyers and sellers of commodities from adverse price movements.
  8. Trading

    An Overview Of Futures, Derivatives and Liquidity

    Futures and derivatives get a bad rap after the 2008 financial crisis but these instruments are meant to mitigate market risk.
  1. How can I calculate the notional value of a futures contract?

    Learn how the notional value of a futures contract is calculated, and how futures are different from stock since they have ... Read Answer >>
  2. What's the best way to play backwardation in the futures market?

    Backwardation is a market condition in which a futures contract far from its delivery date is trading at a lower price than ... Read Answer >>
  3. How do I set a strike price for a future?

    Find out why futures contracts don't have set strike prices like options or other derivatives, even though price change limits ... Read Answer >>
  4. How do futures contracts roll over?

    Learn about why futures contracts are often rolled over into forward month contracts prior to expiration, and understand ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center