How Does the Interest Rate Affect the Cost of Carry for Futures Contracts?

The cost of carry for a futures contract is the net cost of holding the underlying asset until the delivery date. For non-dividend-paying assets, the cost of carry is primarily the interest expense (risk-free rate) incurred on the funds used to buy the asset, minus any income generated.

A higher interest rate increases the cost of carry, which, in turn, typically increases the futures price relative to the spot price, leading to a contango market.