Full Carry

Unveiling Full Carry in Futures Trading

Exploring Full Carry

Full carry is a fundamental concept in the futures market, encapsulating the costs associated with storing, insuring, and financing a commodity for later delivery. Traders use this term to analyze market dynamics and understand the pricing of futures contracts.

Understanding the Concept

Also known as a full carry market, full carry describes a scenario where the price of a futures contract for later delivery equals the price of the near delivery month plus the complete cost of carrying the underlying commodity between the months. This cost includes interest, insurance, and storage expenses, reflecting the opportunity cost of tying up capital in the commodity.

Factors Influencing Full Carry

Market conditions, influenced by supply and demand dynamics, can cause prices to deviate from full carry. While contango, where later contracts are priced higher, is expected for commodities with significant storage and interest costs, market sentiment and anticipated demand can also impact futures prices independently of carrying costs.

Real-world Example

Consider commodity X with a May futures price of $10/unit and a $0.50/month carry cost. If the June contract trades at $10.50/unit, it represents full carry. However, prices exceeding $10.50 suggest market participants anticipate higher valuations in later months beyond carrying costs.

Potential Arbitrage Opportunities

The idealized concept of full carry may not always align with market prices due to supply and demand fluctuations. Backwardation, where longer delivery contracts trade below near delivery contracts, can occur due to short-term factors like shortages or geopolitical events. Trading strategies such as calendar spreads capitalize on differences in contract pricing to exploit perceived market mispricings.