What is Full Carry

In the futures market, when the price of the later delivery month contract equals the price of the near delivery month plus the full cost of carrying the underlying commodity between the months. Carrying costs include interest, insurance and storage. They include opportunity costs as money tied up in the commodity cannot earn interest capital gains elsewhere.

Full carry is also known as a "full carry market" or a "full carrying charge market."


The reason futures markets can have contracts for longer delivery higher priced than contracts for closer delivery is that it costs money to finance and/or store the underlying commodity for that additional length of time. Another term for this is contango, although it does not define the specific differences between the prices of two contract months. It only describers the condition where the price for each contract is higher as delivery dates push father into the future.

For example, let's say commodity X has a May futures price of $10/unit. If the cost of carry for commodity X is $0.50/month and the June contract trades at $10.50/unit. This price indicates a full carry, or in other words the contract represents the full cost associated with the holding the commodity for an additional month.

Carrying costs may change over time. While storage costs in a warehouse may increase, interest rates to finance the underlying may increase or decrease. In other words, investors must monitor these costs over time to be sure their holdings are priced properly.

Potential Arbitrage

Fully carry is an idealized concept because what the market prices a longer futures contract is not necessarily the exact value of the spot price plus the cost of carry. It is the same as the difference between a stock's traded price and its valuation using the net present value of the underlying company's future cash flows. Supply and demand for a stock or futures contract changes constantly so prices fluctuate around the idealized value.

In the futures market, longer delivery contracts could trade below near delivery contracts in a condition called backwardation. Some of the potential reasons may be short-term shortages, geopolitical events and pending weather events.

But even if longer months trade higher than shorter months, they may not represent the exact full carry. This sets up trading opportunities to exploit the differences. The strategy of buying one contract month and selling the other is called a calendar spread.  Which contact is bought and which is sold depends on whether the arbitrageur believes the market priced an overvaluation or undervaluation.