Carry cost
The interest cost built into the gap between a stock's spot price and its futures price, reflecting the cost of funding a spot purchase until the futures contract's delivery date.
In plain language
A stock trades at one price today in the spot market, and usually at a different, higher price in the futures market for delivery on a later date. That gap is not random — it is mostly the cost of money for the time between now and the delivery date.
This gap is called the carry cost. If you wanted to buy the stock today and hold it until the futures delivery date, you would have to fund that purchase somehow, and funding has a cost. The futures price reflects that cost being built in.
How it works
The workbook derives the relationship directly: if a stock trades at a spot price (S) of Rs 100, and the same stock's future for delivery 20 days away trades at a futures price (F) of Rs 120, then F equals S plus the carry cost — the 20-day interest is Rs 20.
The carry cost is not a fixed or risk-free rate — it is a market-driven rate, shaped by the risk lenders take on when funding the position. The logic behind this pricing is the law of one price: the same asset cannot trade at two genuinely different prices in two markets at the same time, once the cost of moving between the two markets is accounted for. If it did, there would be a risk-free arbitrage profit available by buying in the cheaper market and selling in the dearer one.
The gap between spot and futures price is called the basis. On the settlement date itself, spot and futures prices become identical — spot-future convergence — because the carry cost for zero remaining days is zero.
The formula
F = S + carry cost
S = spot price
F = futures price
A worked example
On 3 March, stock XYZ trades at Rs 3,984 in the cash (spot) market. The futures contract for the same stock, delivering on 30 March, 27 days later, trades at Rs 4,032.
Buy XYZ spot Rs 3,984
Sell XYZ futures Rs 4,032
Difference (carry cost) Rs 48
An arbitrageur who buys spot and sells futures locks in this Rs 48 difference. Annualised, the return works out to:
(48 / 3,984) x (365 / 27) = 16.29% p.a.
On the settlement date, spot and futures prices converge to the same level, so the arbitrageur's opposite positions close out at a locked-in profit, regardless of where the stock price actually ends up.
Why NISM asks about it
Chapter 10 (Understanding Derivatives), in the section on pricing a futures contract, works through the F equals S plus carry cost formula and the XYZ arbitrage example above. Expect a question that gives you a spot price and a futures price and asks you to calculate the carry cost, the basis, or the annualised arbitrage return.
Common exam traps
- Carry cost is not a fixed rate you can look up — it is market-driven, and can differ from a simple risk-free interest calculation because of the funding risk lenders price in.
- The basis (in this workbook, futures minus spot: "if futures trade at a level higher than spot prices, the basis is positive") and the carry cost are related but not identical labels — carry cost explains why a basis exists; basis is simply the observed price gap.
- On the settlement date, the carry cost for buying spot and selling futures becomes zero, because spot and futures prices must converge — do not carry a non-zero cost assumption into an expiry-day calculation.
Check yourself
1.What does the chapter say about the nature of the carry cost in futures pricing?
- a)It is the risk-free rate
- b)It is a fixed interest rate set by the exchange
- c)It is a market-driven rate driven by the risk assumed by the lenders to the trading position
- d)It is the same as the dividend yield
Show the answer
Answer: (c) It is a market-driven rate driven by the risk assumed by the lenders to the trading position
"The carry cost is NOT A RISK-FREE RATE OR A FIXED INTEREST RATE, but a MARKET-DRIVEN RATE THAT IS DRIVEN BY THE RISK ASSUMED BY THE LENDERS to the trading position." This is why arbitrage opportunities exist for some traders and not others: their costs of carry differ.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- ConvergenceThe certainty that a futures price and the spot price of its underlying meet at expiry — because on the last trading day the contract settles at the cash market price, leaving no room for a difference.
- BasisThe difference between the spot price and the futures price of an asset — positive when spot exceeds futures, negative when futures exceeds spot, and zero at expiry.
- Cost of carryThe cost of holding an asset until a future date — financing interest plus storage, less any income it pays. It links spot to futures: fair futures price = spot + cost of carry − inflows.
- Cash and carry arbitrageBuying the underlying in the cash market and simultaneously selling futures when futures trade above their fair price, carrying the asset to expiry to lock in the mispricing.
- Spot priceThe price at which the underlying asset trades in the cash market for immediate delivery — the anchor from which futures prices, basis, moneyness and final settlement are all measured.
- Currency pairEvery trade in the foreign exchange market, expressed as one currency bought against another currency sold — the unit in which all currency derivatives are quoted and traded.