Cost of Carry - Explained
What is Cost of Carry?
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What is Cost of Carry?
The cost of carry is defined as the costs that an investor incurs as a result of holding a position in the market. The expenses of holding an asset are called cost of carry, such expenses include storage expenses, insurance, interest costs, and others. Taking an investment position comes with a cost, some of these costs are market costs, opportunity costs, among others. Cost of carry is otherwise called a carrying charge. For instance, when you hold a physical asset such as equipment, machinery or metal, there are costs of storing those assets over a period of time. Incidental costs are also carrying costs, these are unplanned costs incurred over an asset or investment position.
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How Does Cost Of Carry Work?
Every investor needs to painstakingly analyze all potential costs associated to taking a position before they make the investment. Cost of carry does not necessarily indicate a huge amount of money or exorbitant liabilities. In most cases, the strategies put in place in managing the potential costs related to an asset of position determine the level of the financial cost. Cost of carry has different meanings based on the context it was used. For instance, in the capital markets, the cost of entering a position as well as maintenance costs differ from the costs of carry. While in the commodity markets, cost of carry includes costs of maintaining an asset, storage, insurance, and other incidental charges.