cost of carry

(redirected from Cost-of-carry)

Cost of carry

Out-of-pocket costs incurred while an investor has an investment position. Examples include interest on long positions in margin account, dividend lost on short margin positions, and incidental expenses. Related: Net financing cost.

Cost of Carry

The cost of storing a commodity over a period of time. It includes incidental costs, insurance coverage, and the physical cost of storage. It does not include depreciation, if any. The carrying charge is incorporated in the price of a commodity on the futures market. See also: Carrying costs.

cost of carry

Direct costs paid by an investor to maintain a security position. For example, an individual purchasing securities on margin must pay interest expenses on borrowed funds. Likewise, an investor selling stock short is responsible for making dividend payments to the buyer. Also called carrying charges.
References in periodicals archive ?
Among the topics are stocks, arbitrage and trading, the extended cost-of-carry model, the multi-period binomial model, and interest rate swaps.
If the spot asset cost-of-carry were constant, MRM and TRM regression [beta]s would be the same.
The cost-of-carry model cannot be used to control for changes in the hedge ratio caused by changes in the futures contract time-to-maturity or other changes in the conditioning information set (such as those discussed in Bell and Krasker, 1986; and Leistikow, 1993; and those empirically verified in Leistikow, 1989).
However, in the more mainstream, longer standing, and more widely accepted cost-of-carry literature (Working, 1949, is one of the seminal papers), the ([F.
St]) as called for by the cost-of-carry model, where [[C.
The following spot-price change cost-of-carry adjustment was used.
In each case, the hedge profit is calculated as the spot cost-of-carry adjusted price change minus the product of the futures price change and the hedge ratio.
In practice, data errors can occur because the cost-of-carry rates, spot prices, and futures prices are not recorded contemporaneously or because of recording mistakes.
Finally, there is no explicit ECM cost-of-carry variable through which cost-of-carry rate data errors can enter.
The cost of carry is small because the carry period is less than three months and the annual cost-of-carry rate is small.
Hedge profits, hedging performance measures, and regression approach hedge ratios should be based on cost-of-carry adjusted price changes (denoted MRM for Modified Regression Method), not on actual price changes as in the TRM.
The MRM calculates the hedge ratio using price changes as given by the cost-of-carry model, whereas in effect the ECM uses the basis times the proportionate hedge period (i.