Full Carry

What Is Full Carry?

Full carry is a term that applies to the futures market and suggests that the costs of putting away, guaranteeing, and paying interest on a given quantity of a commodity have been fully represented in later months of the contract compared to the current month.

Seeing Full Carry

Full carry is otherwise called a "full carry market" or a "full carrying charge market," and traders utilize these expressions to make sense of a situation where the price of the later delivery month contract equals the price of the close to delivery month plus the full cost of carrying the underlying commodity between the months.

The full carrying costs incorporate interest, insurance, and storage. This permits traders to compute opportunity costs as money tied up in the commodity can't earn interest or capital gains somewhere else.

It is reasonable to expect futures markets to have contracts for longer delivery priced higher than contracts for nearer delivery since it costs money to finance or potentially store the underlying commodity for that extra timeframe. The term that portrays higher prices for later contracts is contango. The natural occurrence of contango is expected for those commodities that have higher costs associated with storage and interest. In any case, anticipated demand in later months can put a premium on later contract prices fully independent of any carry costs.

For instance, suppose commodity X has a May futures price of $10/unit. In the event that the cost of carry for commodity X is $0.50/month and the June contract trades at $10.50/unit, this price shows a full carry, or as such, the contract addresses the full cost associated with holding the commodity for an extra month. In any case, assuming prices in later contracts transcended $10.50, this would suggest that the market participants expect higher valuations for the commodity in later months because of reasons other than the carry cost.

Carrying costs might change after some time. While storage costs in a warehouse might increase, interest rates to finance the underlying might increase or diminish. At the end of the day, investors must monitor these costs over the long run to be certain their holdings are priced appropriately.

Likely Arbitrage

Full carry is a romanticized concept since what the market prices a more drawn out futures contract isn't really the specific value of the spot price plus the cost of carry. It is equivalent to the difference between a stock's traded price and its valuation utilizing the net present value of the underlying organization's future cash flows. Supply and demand for a stock or futures contract change continually so prices vary around the glorified value.

In the futures market, longer delivery contracts could trade below close to delivery contracts in a condition called backwardation. A portion of the potential reasons might be short-term shortages, international events, and pending climate events.

Yet, even assuming that more extended months trade higher than shorter months, they may not address the specific full carry. This sets up trading opportunities to take advantage of the differences. The strategy of buying one contract month and selling the other is called a calendar spread. Which contract is bought and which is sold relies upon whether the arbitrageur accepts the market priced an overvaluation or undervaluation.

Features

• Full carry costs give a clarification to why later contracts are more costly,
• Market conditions, driven by supply and demand, can move prices well below or well above full carry.
• Full carry is the cost of interest, storage, and insurance on a commodity.