Definition
The term carrying charge market is used to describe a condition where spot prices are lower than the long-term price of a futures contract. A carrying charge market is considered a normal market condition.
Explanation
When the price of a futures contract trading in the near term is lower than the equivalent contract with a longer term to expiration, this condition is said to be a carrying charge market. The term emanates from the "carrying charges" an owner would incur for holding an asset. For example, if the owner of a commodity were to hold this asset for several months into the future, they would incur costs associated with insuring the commodity from damage, interest charges associated with funding the purchase of the commodity (opportunity costs), as well as the cost to store the commodity.
Also referred to as a full carry market, a carrying charge market is characterized by higher prices for futures contracts as the time to expiration increases. Over time, the time to expiration for these longer-duration contracts nears and the contract price would converge to the spot price of the commodity.
Related Terms
The term equilibrium price refers to a state in which the quantity of goods supplied is equal to the demand for the same goods. Prices are typically stable for a product when they reach the equilibrium price.
Moneyzine EditorNovember 6th, 2024
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