Why Is the Opportunity Cost of Capital a Crucial Factor in the Cost of Carry Calculation?

The opportunity cost of capital is crucial because even if the arbitrageur uses their own cash to buy the spot asset, that capital could have been invested elsewhere to earn a return. This forgone return is a real economic cost.

In the cost of carry calculation, the opportunity cost (often approximated by the risk-free rate) must be included as the financing cost to accurately determine the true economic profitability of the arbitrage trade.