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Video: Cost of Carry Pricing Model

August 26, 2009 at 9:25 by Andriy Moraru

Today I offer two commodity trading videos for watching. They both describe the “cost of carry” pricing model, which is a part of fundamental analysis for commodity futures valuation. The theory of “cost of carry” states that the forward prices on the commodities are driven by four time-based factors: risk-free interest rate, storage cost, income and convenience yield. The first two factors are driving the forward price up because they add cost to keeping the actual commodity over the time. The last two factors are driving the forward price down because they reduce the cost of keeping the physical commodity for its owner. The first video explains the theory in general, while the second video presents an example of “cost of carry” model calculation for the corn futures price. In that video the problems of this model become obvious — it doesn’t count in the seasonality of the commodities and the technical factors (like speculation).



Created by David Harper (financial risk manager) from Bionic Turtle.

If you found this video useful to you and want to see more videos like it or if you want to see a commodity trading video on some other topic, please, reply using the form below.

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