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What is the Meaning of the Concepts of "Cost-of-Carry" and "Basis"?

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The difference between the cash index and the forward (futures) price is generally called basis.

Cost of carry (CoC) denotes the net cost incurred when the underlying instrument is bought on the cash market, and held (carried, "carry") until maturity of the forward transaction.

Holding and financing costs of commodity futures transactions are usually higher than the income generated (or there is no income at all). The forward price is therefore higher than the cash index.

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This situation is usually termed "negative basis" or "negative cost of carry".

Cost-of-Carry constitute in > earnings in case of financing costs. As costs are generally seen as negative the term "negative basis" or "negative CoC" can be related to.

If the income is higher than the financing or holding costs, the forward price lies below the cash price.

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This is called a positive basis or positive cost of carry.

A positive basis can be the case with fixed income futures , such as for instance Euro Bund Futures. Also with equity futures a positive basis is possible if the dividends are higher than the short term financing cost basis.

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