To analyze the cost of carry in futures contracts, subtract the spot price of the asset from the futures price. The result shows the cost of holding the asset until the contract expires. This cost includes interest rates, storage, dividends, or other carrying costs. A positive cost of carry means futures are priced higher than spot; a negative cost of carry means the opposite.

What Is Cost of Carry in Futures?

The cost of carry in futures refers to the cost of holding an asset until the futures contract’s expiration date. It includes expenses like interest (financing), storage, and insurance. If the asset pays a return (like dividends), that’s subtracted. This total cost affects the price of the futures contract and helps traders spot arbitrage opportunities or understand market sentiment.

How to Calculate Cost of Carry?

To calculate the cost of carry, use this formula: Cost of Carry = Futures Price – Spot Price. If you want more detail, it becomes: F = S × e^(r – d)t, where F is the futures price, S is the spot price, r is the risk-free interest rate, d is the dividend yield, and t is the time in years. Traders often use online calculators or spreadsheets for this.

Why Does Cost of Carry Matter to Traders?

The cost of carry helps traders understand the relationship between spot and futures prices. If the cost of carry is high, futures prices rise above the spot price, indicating bullish sentiment. If it’s low or negative, it may suggest bearish views or short-selling pressure. Traders use this insight to decide entry and exit points in futures trading.

What Is Positive and Negative Cost of Carry?

A positive cost of carry means the futures price is higher than the spot price. This usually happens when interest and storage costs are higher than dividends. A negative cost of carry occurs when the spot price is higher than the futures price, often due to high dividends or market pessimism. This information can help in arbitrage strategies.

How Does Cost of Carry Affect Index Futures in India?

In India, cost of carry is commonly seen in Nifty and Bank Nifty futures. A rising cost of carry indicates bullish momentum and long positions, while a falling or negative cost shows bearish pressure or short positions. Traders on NSE often watch this closely to gauge market direction and institutional activity.

Can Cost of Carry Predict Market Sentiment?

Yes, cost of carry often reflects investor sentiment. If the cost is high and rising, traders expect prices to move higher, showing bullishness. If it’s low or negative, it shows nervousness or bearish sentiment. Watching this trend helps traders take more informed positions in futures trading.