Define the ‘Cost of Carry’ in the Context of Financial Derivatives.
The cost of carry is the net cost or benefit of holding an underlying asset. It is calculated as the cost of financing the asset (e.g. interest on borrowed money) plus any non-financial costs (e.g. storage) minus any income generated by the asset (e.g. dividends or staking rewards).
It is a key factor in determining the theoretical price of futures and options.
Glossar
Cost of Carry
Calculation ⎊ The Cost of Carry for a crypto derivative position quantifies the net expense incurred from holding the underlying asset until the contract's expiration or settlement date.
Cost of Financing
Funding ⎊ The cost of financing, within cryptocurrency derivatives, options trading, and broader financial derivatives contexts, represents the aggregate expense incurred to secure capital for trading activities or to maintain leveraged positions.
Positive Cost of Carry
Favorable Carry Environment ⎊ A market condition where the cost associated with holding a leveraged position is negative, meaning the trader receives a net payment for maintaining the position over time, often seen when funding rates are strongly negative.