What you will learn
- Financing
- Storage and insurance
- Lease and convenience concepts
- Limits of simplified carry models
Financing
Financing is one component of carrying an asset across time. A simplified carry model relates current ownership costs and future delivery, but its assumptions must be stated rather than treated as a universally executable arbitrage.
Storage and insurance
Storage and insurance affect the economics of holding physical material. Actual arrangements, location and eligibility matter. A generic percentage may not represent the costs accessible to a particular participant.
Lease and convenience concepts
Lease-related and convenience concepts describe benefits or costs associated with access to the physical asset. They can vary with availability and market conditions. An unexplained residual in a simple formula should not automatically be assigned to one hidden variable.
Limits of simplified carry models
Simplified models omit constraints such as credit, transaction costs, delivery eligibility and operational access. A theoretical price difference can persist when the required trades are not available on the assumed terms.
Worked example
A worksheet estimates carry of 2 while observed matched basis is 3. The difference of 1 is not automatically a free profit; financing access, execution costs and delivery constraints may explain or consume it.
Try it yourself
List four assumptions that must be checked before treating that difference as an executable opportunity.
Show the worked solution
Check matched instruments and dates, actual financing terms, storage/delivery eligibility and all transaction costs. Also assess credit and operational constraints. The residual is a research question until the trade can be specified realistically.
Apply this to your course project
Build a two-expiry scenario sheet with carry assumptions and roll-cost sensitivity.
Keep the calculation inputs, assumptions and decisions with your work. Practical exercises are self-reviewed; the scored knowledge checks assess the questions shown, not an independent certification of practical competence.