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Carry trade: Difference between revisions
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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 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]] — | 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]]” — by an amount greater than your [[cost of funding]], then all you have to do to make money is | ||
#Today, borrow the money you need to buy the spot asset at your cost of funding for a term until your desired point in the future | #Today, borrow the money you need to buy the spot asset at your cost of funding for a term until your desired point in the future | ||
#Today, buy the asset in the spot market at its spot price; | #Today, buy the asset in the spot market at its spot price; | ||