Cost of carry: is an indicator of the demand-supply forces in the Futures market. It basically means the annualized interest cost players decide to pay (receive) for buying (selling) a respective contract. A higher carry cost is indicative of buying pressure and vice versa. Carry Cost is a widely used parameter not only because it is more interpretable being an annualized figure, as compared to basis (Cash netted for Futures) but also because it works well with the trio of Price, Volume and Open Interest in highlighting the market trend.
The cost of carry is the cost of "carrying" or holding a position. If long, the cost of carry is the cost of interest paid on a margin account. Conversely, if short, the cost of carry is the cost of paying dividends, or opportunity cost the cost of purchasing a particular security rather than an alternative.
Is there a theoretical way of pricing Index Future?
The theoretical way of pricing any Future is to factor in the current price and holding costs or cost of carry.
The Futures Price = Spot Price + Cost of Carry
Cost of carry is the sum of all costs incurred if a similar position is taken in cash market and carried to maturity of the futures contract less any revenue which may result in this period. The costs typically include interest in case of financial futures (also insurance and storage costs in case of commodity futures). The revenue may be dividends in case of index futures.
Apart from the theoretical value, the actual value may vary depending on demand and supply of the underlying at present and expectations about the future. These factors play a much more important role in commodities, especially perishable commodities than in financial futures.
In general, the Futures price is greater than the spot price. In special cases, when cost of carry is negative, the Futures price may be lower than Spot prices.
Hi seniors, the above are the different CoC definitions, which is rather too complex/technical, could anyone explain in layman's simple english, please?
I have 2 questions:
1. Does CoC mean giving interest for the margin taken (whole amount, e.g., minifty 1lot = 20*4200 = 88000) or for the (initial margin =10290)
Please see
http://www.nseindia.com/marketinfo/fo/foquote.jsp?key=FUTIDXMINIFTY25SEP2008--19SEP2008&symbol=MINIFTY&flag=1, the cost of carry shows 68 and 71 for buy and sell, what are they and how do they affect my futures position? is that an additional tax/obligation?
Like i bought minifty sept 1lot@4000 and sold that at 4195 the next day, now i incur a brokerage of 0.03+stt+taxes, will this coc adds up to it? and
2. Is coc also applicable to "dividend-less" scrips like rpl? please see:
http://www.nseindia.com/marketinfo/equities/cmquote.jsp?key=RPLEQN&symbol=RPL&flag=0
thanks in advance.