Cost of Carry

The net financing cost of holding an asset — interest paid minus dividends/income received.

Cost of carry determines the forward-spot relationship: F = S × e^((r−δ)T) for a continuous dividend yield δ. It represents: (1) financing cost = r × S × T (cost of borrowing to buy the asset), minus (2) income received = δ × S × T (dividends or coupons). Positive carry means holding the asset costs money (storage commodities). Negative carry means the asset generates income exceeding financing (high-dividend stocks in low-rate environments). In FX, carry = domestic rate − foreign rate.

Related Terms

Interest Rate Swap (IRS)

An agreement to exchange fixed-rate cash flows for floating-rate cash flows on a notional principal.

Equity Forward Contract

A commitment to buy or sell an equity at a fixed price F₀(T) at a future date T, priced to have zero value at inception.

FX Forward Rate

The agreed exchange rate for a future currency transaction, derived from Covered Interest Rate Parity.