LANGUAGE LAB. Carrying charges

When it comes to commodities, particularly agricultural produce and metals, there is a cost involved not only in transporting them but also storing them in warehouses.

This also entails paying interest to banks for the loan taken by a producer in manufacturing or producing a product.

Called Cost of Carry, this denotes the cost of storing a physical commodity or holding a financial instrument over a period of time. Carrying costs also include premium for insuring the commodity against any sort of damage, including theft.

Other than this besides storage charges and interest, there are incidental costs also involved.

These include moving the commodities, loading and unloading charges.

Carrying costs are part of any commodity pricing, especially spot, but they reflect sharply in the futures or derivatives.

The cost of carry summarises the relationship between the futures and spot prices. It is the cost of 'carrying' or holding a position from the date of entering into the transaction up to the date the contract matures.

It measures the storage cost plus interest that is paid to finance the asset, less the income earned on the asset.

Cost to carry may not be an extremely high if it is effectively managed.

For example, the longer a position is made on margin, the more interest payments will need to be made on the account.

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