Understanding carrying & borrowing costs

Carrying cost is applied to every commodities trade, long or short, at the prevailing carrying rate. It reflects the cost (or benefit) involved in holding the position overnight:

Transaction Carrying Cost =
(Opening transaction value x Carry rate buy or Carry rate sell(as applicable) / 365

Important note: The carrying rate will change on a daily basis and large changes are likely to happen on the day the front month futures contract expires, and on the following business day.

When the cash price is lower than the near month futures contract, investors are willing to pay less for the commodity now than in the future. This is seen regularly for non-perishable commodities like gold or Silver as they have relatively low carrying costs.

A near month future can be higher than one that expires in a few months. This can be caused by seasonal factors being greater than other costs of carry such as storage and interest, implying people are prepared to pay more for the commodity now than receiving it in the future. Here the cash price will be higher than the futures price and this can regularly occur for perishable and inventory-sensitive commodities. For example, natural gas might be in short supply during the winter months when short-term demand is high.

Therefore, carrying costs can be positive or negative:

CMC Markets price is below the futures prices:

• Buy trade generally charged carrying cost
• Sell trade generally receives carrying cost

CMC Markets price is above the futures prices:

• Buy trade generally receives carrying cost
• Sell trade generally charged carrying cost

With cash commodities, unlike futures, you can take advantage of what is known as a carry trade. This is a strategy in which an investor sells (or buys when the cash price is above the futures price) a certain commodity with a relatively high carrying cost, in an attempt to profit from receiving this payment. The investor would believe that the carrying cost is going to be greater than any price appreciation and interest expense (if any) in taking out the position. These carrying costs can often be substantial, depending on the instrument you are trading:

• Energy commodities: In particular, Natural Gas and Heating Oil are known for having highly volatile carrying costs due to storage constraints, seasonality factors, weather and politics.
• Agricultural commodities: Droughts, fires, disease, workforce issues, political interference and bad weather are all elements that can impact supply and cause carrying costs to increase dramatically in a short period of time.
• Precious metals: These commodities, on the other hand, generally have low carrying costs due to their low cost of storage and non-perishable nature. A carry trade here might be more difficult to profit from

When you make an investment in a commodity with our trading platform you have the option to borrow funds to finance that position. If you do decide to borrow funds, you will be charged a borrowing cost, which is applied to the unfunded portion and is charged regardless of the trade’s direction.

Transaction Borrowing Cost =
(Opening transaction value – Margin) x Borrowing rate / 365

Important note: We calculate the borrowing rate based on the interbank lending rates on the day (plus a small spread).

You decide to buy into a rising commodity market. Your trade’s total position value is 10,000 and you choose to fund 50% of this trade yourself, and borrow the remaining amount of 50% (5,000) from CMC Markets.

Borrowing cost: Assuming the borrowing rate is the current benchmark rate (let’s say 2%), plus a CMC Markets margin of 2%, your overnight financing cost will equal:

Carrying cost: As the future moves towards expiry, the carrying rate generally decreases. The start of the new front futures contract will see a rise in the carrying cost.

Carrying cost on the 23rd - A few days prior to the expiry date of the front month futures contract, the carrying rate in this example is 1.5%. So the holding cost on this day would equal:

Holding cost = Borrowing cost + Carrying cost
Holding costs = 0.55 + 0.41
Financing cost = 0.96 per night

Note: If the commodity is not in your local currency, the current CMC spot exchange rate would be applied.

Carrying cost on the 29th - The new carrying rate in this example is equal to 4.2%. The rate now includes the cost of carrying this commodity up until the expiry date of the new front month futures contract:

Holding cost = Borrowing cost + Carrying cost
Holding costs = 0.55 + 1.15
Financing cost = 1.70 per night

Note: If the commodity is not in your local currency, the current CMC spot exchange rate would be applied.

Important note: If you were holding a futures contract you would be sold out at the close price on the 29th and reopened at the new open price of the next futures contract. With the cash commodity, your price will not jump and you will continue to receive a smooth continuous price (no rollover cost).

You’ll notice that the CMC Markets cash price on a commodity is currently much higher than the futures price, therefore the carrying cost is positive and you would receive this payment when you buy into this market.

If the current carry rate was 17.3% (due to seasonality issues in the likes of gasoline or heating oil) a carry trader might decide to place an investment of 10,000 and fund 50% of this with their own funds to take advantage of this high rate of carry. The overall holding benefit would equal:

Holding cost = Borrowing cost + Carrying cost/benefit

Holding cost = 0.55 – 4.73
Holding benefit = 4.18 per night
Note: If the commodity is not in your local currency, the current CMC Markets spot exchange rate would be applied.