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Carry trade: Difference between revisions
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{{a|g|{{image|carry trade|png|A classic commodities [[carry trade]], yesterday. You execute the spot purchase and the forward sale at the same time.}}}}A transaction where one takes advantage of the futures market. “[[Positive carry]]” describes the state of affairs when the expected return on an asset is greater than the cost of owning it — being the implied cost of financing it, as well as actual costs of [[Custody|holding]] and insuring it. This means you can do a carry trade: borrow money to buy the asset and arrange to sell it forward later, and pay down your loan. | {{a|g|{{image|carry trade|png|A classic commodities [[carry trade]], yesterday. You execute the spot purchase and the forward sale at the same time.}}}}{{quote| | ||
''Carry doesn’t live here anymore <br> | |||
''Carry used to room on the second floor <br> | |||
''Sorry that she left no [[forward]] address <br> | |||
''Because her main financing was in distress. | |||
:—Riff Clichard, ''Carry'' (1982, needless to say, a time of usurious interest rates)}} | |||
A transaction where one takes advantage of the futures market. “[[Positive carry]]” describes the state of affairs when the expected return on an asset is greater than the cost of owning it — being the implied cost of financing it, as well as actual costs of [[Custody|holding]] and insuring it. This means you can do a carry trade: borrow money to buy the asset and arrange to sell it forward later, and pay down your loan. | |||
If you can see that the spot price of an asset today is lower than its forward price (as implied by the futures price) — that is, the forward curve is in [[contango]] — buy an amount greater than your [[cost of funding]], then all you have to do to make money is | If you can see that the spot price of an asset today is lower than its forward price (as implied by the futures price) — that is, the forward curve is in [[contango]] — buy an amount greater than your [[cost of funding]], then all you have to do to make money is | ||