Moneyzine
Contents
/Investment Guides /Carrying Charge

Carrying Charge

Moneyzine Editor
Author: 
Moneyzine Editor
2 mins
January 10th, 2024
Advertiser Disclosure
Carrying Charge

Definition

The term carrying charge refers to the total cost associated with owning a financial instrument or physical commodity. Carrying charges will include applicable cost such as financing, storage, and insurance.

Explanation

Whenever an investor chooses to own a stock, bond, or physical commodity, they need to understand the total cost of ownership. Carrying charges are those costs the investor must pay to own the asset over time. As such, it's important to quantify these costs since they can erode the return on investment.

Typical carrying charges include financing costs, which are the interest charges levied on borrowed funds. When applied to physical commodities, carrying charges can also include the cost to transport, store, and insure the asset against hazards.

When the price of a forward contract or commodity future is quoted, it will usually include carrying charges. This is because the cost to deliver a commodity in the future should include both the cost to purchase the asset (its spot price) plus the associated carrying charges. If the quoted price on a futures contract didn't include carrying charges, the investor would be presented with an arbitrage opportunity.

Example

The spot price of a commodity is currently $100 per standard unit, and the carrying charges associated with the asset is $10 per month. When valued correctly, the two-month future price would be equal to the spot price of the commodity plus two months of carrying charges or $100 + (2 x $10), which is equal to $120. If the futures price of the commodity were $125, an arbitrageur could purchase a unit on the spot market for $100, store it for two months for $20, sell the futures contract for $125, and earn an immediate $5 return.

Related Terms

  • Cash Market (Spot Market)
    The term cash market refers to a marketplace where securities and commodities are exchanged for cash with immediate delivery. Cash markets can be regulated or unregulated markets.
    Moneyzine Editor
    Moneyzine Editor
    January 10th, 2024
  • Cash Commodity
    The term cash commodity refers to a physical commodity to be delivered as part of an agreement or contract. Cash commodities can be agricultural products, precious metals, and even financial instruments like treasury bills.
    Moneyzine Editor
    Moneyzine Editor
    January 10th, 2024
  • Bretton Woods Agreement
    The term Bretton Woods Agreement refers to the creation of a system for managing exchange rates and conducting monetary policy. Developed in 1944, the Bretton Woods Agreement was a product of the 44 Allied nations of World War II.
    Moneyzine Editor
    Moneyzine Editor
    January 9th, 2024

Contributors

Moneyzine 2024. All Rights Reserved.