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calculate the future prise with commodity with storage I need a question about it

calculate the future prise with commodity with storage

I need a question about it

Solutions

Expert Solution

FUTURE PRICE OF COMODITY WITH STORAGE COST IS CALLED COST OF CARRY

What Is Cost of Carry?

Cost of carry refers to costs associated with the carrying value of an investment. These costs can include financial costs, such as the interest costs on bonds, interest expenses on margin accounts, interest on loans used to make an investment, and any storage costs involved in holding a physical asset.

Theoretically, the price of a futures contract is the sum of the prevailing spot price and the cost of carry. (See formula) But the actual price of futures contract also depends on the demand and supply of the underlying stock.

Formula:
Futures price = Spot price + cost of carry
Or cost of carry = Futures price – spot price

BSE defines the cost of carry as the interest cost of a similar position in cash market and carried to maturity of the futures contract, less any dividend expected till the expiry of the contract.

Example:
Suppose the spot price of scrip X is Rs 1,600 and the prevailing interest rate is 7 per cent per annum. Futures price of one-month contract would therefore be:
1,600 + 1,600*0.07*30/365 = Rs 1,600 + Rs 11.51 = 1,611.51
Here, Rs 11.51 is the cost of carry.


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