The cost of carry model expresses the
forward price (or, as an approximation, the
futures price) as a function of the
spot price and the cost of carry. :F = S e^{(r+s-c)t}\, where : F is the
forward price, : S is the
spot price, : e is the base of the
natural logarithms, : r is the
risk-free interest rate, : s is the storage cost, : c is the
convenience yield, and : t is the time to delivery of the
forward contract (expressed as a fraction of 1 year). The same model in currency markets is known as
interest rate parity. For example, a US investor buying a Standard and Poor's 500 e-mini
futures contract on the
Chicago Mercantile Exchange could expect the cost of carry to be the prevailing risk-free interest rate (around 5% as of November, 2007) minus the expected dividends that one could earn from buying each of the
stocks in the
S&P 500 and receiving any
dividends that they might pay, since the
e-mini futures contract is a proxy for the underlying stocks in the S&P 500. Since the contract is a futures contract and settles at some forward date, the actual values of the dividends may not yet be known so the cost of carry must be estimated. == See also ==