Updated for the 2026-2027 CFA® Level I curriculum.
The spot price is what an asset costs today. The forward price is not a guess about tomorrow's price. It is built from today's spot price plus the net cost of holding that asset until the contract expires. This note explains why cost of carry connects the two, and how candidates use it to price forward contracts without confusing price with forecast.
Quick Answer
Cost of carry is the net cost of holding an asset until a forward contract expires. It equals financing and storage costs minus any income or convenience benefit the asset generates while held. The no-arbitrage forward price equals the future value of the spot price plus this net carry: . Forward price reflects arbitrage conditions, not a market forecast of the future spot price.
Key Takeaways About Spot Price, Expected Future Price, and Cost of Carry
Spot price is today's market price. Expected future spot price is a forecast. Forward price is neither.
Forward price comes from no-arbitrage conditions, using the cost of carry model.
Cost of carry includes financing cost and storage or insurance costs.
Income or convenience benefits from holding the asset reduce cost of carry, they are not additional costs.
Net cost of carry can be positive, zero, or negative depending on which side dominates.
Positive net carry raises the forward price above the future value of spot at the risk-free rate. Negative net carry lowers it.
A common error is adding dividend or coupon income as a cost instead of subtracting it as a benefit.
What You Need to Know for CFA Level I
Distinguish spot price from expected future spot price in plain terms.
Explain why forward price is derived from arbitrage, not from forecasting.
Identify the components of cost of carry: financing, storage, and income or convenience yield.
Determine whether net cost of carry is positive, zero, or negative given a scenario.
Apply the cost of carry formula to compute a no-arbitrage forward price.
Avoid mixing up price, value, and payoff when discussing forward contracts.
Spot Price vs Expected Future Price
Spot price is the price you pay to buy the asset right now. Expected future spot price, written , is what market participants think the asset will be worth at a future date . It is a forecast, and forecasts vary by person.
Forward price, , is different from both. It is the price set today for delivery of the asset at time . It comes from a no-arbitrage argument, not from anyone's opinion about where the market is headed.
Here is why the distinction matters. If forward price equaled expected future spot price, then a dealer without a view on the market could not quote a forward contract confidently. Instead, forward price is anchored to today's spot price adjusted for the cost of carrying that asset to expiration. Two dealers with completely different views on future prices can still agree on the same forward price, because that price is not a forecast.
What Is Cost of Carry?
Cost of carry is the net cost of holding the underlying asset from today until the forward contract's expiration date. It captures everything that changes in value while you hold the asset instead of buying it later.
If you buy the asset today instead of at expiration, you tie up capital (financing cost) and may pay to store or insure it (carrying costs). You may also receive income or a convenience benefit while holding it. Cost of carry nets these effects together.
Components of Cost of Carry
Component | Type | Effect on Forward Price |
|---|---|---|
Financing cost | Cost | Increases forward price (opportunity cost of capital, tied to risk-free rate) |
Storage or insurance | Cost | Increases forward price (common for commodities) |
Dividends or coupon income | Benefit | Decreases forward price (cash received while holding) |
Convenience yield | Benefit | Decreases forward price (value of holding a scarce physical asset) |
Financing cost applies to almost every underlying. Storage costs mostly apply to physical commodities. Income applies to dividend-paying stocks and coupon-paying bonds. Convenience yield applies mainly to commodities where physical possession has value beyond price, such as avoiding a supply shortage.
Positive, Zero, and Negative Net Cost of Carry
Net cost of carry is the balance of costs minus benefits.
Net Cost of Carry | What It Means | Effect on Forward Price |
|---|---|---|
Positive | Costs exceed benefits | Forward price is above the future value of spot at the risk-free rate |
Zero | Costs equal benefits, or neither applies | Forward price equals the future value of spot at the risk-free rate |
Negative | Benefits exceed costs | Forward price is below the future value of spot at the risk-free rate |
Non-dividend-paying stocks with no storage cost typically show a net cost of carry of zero beyond financing. A dividend-paying stock usually shows negative net carry once income is included, because that income offsets the financing cost.
How Cost of Carry Affects Forward Price
The cost of carry model states:
Where:
= no-arbitrage forward price for a contract expiring at time
= spot price today
= risk-free financing rate, annualized
= time to expiration, in years
= future value of storage or insurance costs incurred over the holding period
= future value of income or convenience yield received over the holding period
The term is the future value of spot at the risk-free rate. Net cost of carry, minus , adjusts that baseline up or down. This is why two assets with the same spot price can have different forward prices. Their carry profiles differ.
Why Forward Price Is Not a Forecast
Forward price is enforced by arbitrage. If a dealer quoted a forward price above , an arbitrageur could sell the forward, buy the asset at spot using borrowed funds, hold it, collect any income, and deliver it at expiration for a risk-free profit. If the quote fell below , the reverse trade works. This keeps forward price pinned to the cost of carry model regardless of what anyone expects the future spot price to be.
This is the core reason candidates must separate forward price from expected future spot price. The forward price is a mechanical result of arbitrage. The expected future spot price is a market opinion. They can differ, and often do.
Cash-and-Carry Arbitrage and Forward Pricing
Cash-and-carry arbitrage enforces the no-arbitrage forward price. If a forward is overpriced relative to the spot price plus net carrying costs, an arbitrageur can buy the underlying asset, finance and carry it, and sell the forward. At expiration, the asset is delivered into the forward contract and the locked-in difference becomes the arbitrage profit.
If the forward is underpriced, a reverse cash-and-carry strategy may apply: short the underlying asset, invest the sale proceeds, and take a long forward position to repurchase the asset at expiration. In either direction, trading pressure pushes the forward price back toward the cost-of-carry relationship.
Worked Example
A dividend-paying stock trades at a spot price of $50. The risk-free rate is 6% annually. A forward contract expires in 0.5 years. The stock is expected to pay a dividend during that period with a future value at expiration of $1.20. There are no storage costs.
Step 1: Find the future value of spot at the risk-free rate.
Step 2: Apply net cost of carry.
Step 3: Compute the forward price.
The dividend lowers the forward price below the pure financing-adjusted value. Anyone holding the stock collects that dividend, so the forward price reflects a smaller net cost of carry than a non-dividend-paying stock would show. This is a negative net carry effect, and it has nothing to do with whether anyone expects the stock price to rise or fall.
Common Exam Traps
Treating the forward price as a forecast
Forward price comes from no-arbitrage conditions. It says nothing about where candidates or the market think the price is headed.
Adding income as a cost instead of subtracting it as a benefit
Dividends, coupons, and convenience yield lower the forward price. Adding them by mistake produces a forward price that is too high.
Ignoring the sign of net carry
A negative net cost of carry still changes the forward price. Skipping the sign, or assuming carry is always positive, leads to the wrong direction of adjustment.
Mixing spot price, forward price, and contract value
Spot price is today's market price. Forward price is the price fixed for future delivery. The value of a forward contract to a party is a separate calculation that starts near zero at initiation and changes as spot price moves. Do not use these terms interchangeably.
Practice Questions
A non-dividend-paying stock has a spot price of $80. The risk-free rate is 5% annually. A forward contract on the stock expires in one year. There are no storage costs and no income.
What is the no-arbitrage forward price?
$76.19
$80.00
$84.00
Correct Answer: C
Calculation:
With no storage costs and no income, net cost of carry equals the financing cost only. The forward price is simply the future value of spot at the risk-free rate.
Option A: $76.19 divides spot by (1.05) instead of multiplying, reversing the compounding direction.
Option B: $80.00 ignores the financing cost entirely, as if net cost of carry were zero when it is actually positive here.
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FAQs About Spot Price, Expected Future Price, and Cost of Carry
Is the forward price the same as the expected future spot price?
No. Forward price comes from a no-arbitrage relationship between spot price and cost of carry. Expected future spot price is a market forecast and can differ from the forward price.
What does it mean if net cost of carry is negative?
It means the benefits of holding the asset, such as dividends or convenience yield, exceed the costs. The forward price ends up lower than the future value of spot at the risk-free rate.
Does cost of carry apply to every underlying asset?
Financing cost applies broadly. Storage costs mostly apply to physical commodities. Income applies to dividend-paying stocks and coupon-paying bonds. Convenience yield applies mainly to commodities held for operational use.