Question

Which term describes the cost to hold an asset until the delivery date of a futures contract?

• A. Maintenance margin
• B. Basis
• C. Cost of Carry
• D. Forward premium
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Hint:

$\text{Cost of Carry}$ represents the total cost of holding an asset (such as interest and storage costs) minus any income it generates (such as dividends) until the futures delivery date.

Answer 1

The Correct Option is C

Step 1: Explaining Derivatives Pricing Relationships:
In derivatives pricing, the relationship between the cash (spot) price and the futures price of an asset is influenced by the costs of holding that asset over time.

Step 2: Identifying Carrying Expenses:
Carrying physical inventory over a period of time involves storage costs, insurance, and financing/interest costs, minus any income earned (such as dividends).

Step 3: Matching the Term:
The net expense incurred to hold an underlying asset until the delivery date of a futures contract is called the Cost of Carry (C).