Build a carrying-cost comparison with explicit units

Describe the physical comparison first

Specify the commodity unit, quality, location and horizon before assigning costs. A storage charge per barrel per day cannot be added directly to a price per metric ton. Financing also needs a principal and day-count convention. The lab uses simple financing on the near price and separately adds storage and horizon insurance.

The near futures price is only an illustrative acquisition-price proxy in this exercise. It is not a verified cash purchase, a warehouse receipt or a guarantee of access to physical inventory. CME’s educational discussion identifies financing, storage and insurance as carrying considerations, but a complete physical transaction would involve additional contract and operational details.

Reconcile the default synthetic example

Take near price 80, far price 82, sixty days, annual simple funding rate 0.05, storage 0.015 per unit per day and insurance 0.10 per unit for the entire horizon. Financing is 80 times 0.05 times 60/365, approximately 0.657534 per unit.

Storage is 0.015 times sixty, or 0.90. Adding the near price, financing, storage and insurance gives a simplified carry comparison of 81.657534. Subtracting that from the far price leaves approximately 0.342466 per unit. Every input is invented; the example establishes the formula rather than an available market transaction.

Change one assumption at a time

Raise storage to 0.02 per unit per day while holding the other inputs fixed. Storage becomes 1.20, increasing the comparison price by 0.30 and reducing the residual to approximately 0.042466. This sensitivity is visible because storage is modeled as an absolute unit charge rather than buried in an unexplained yield.

If insurance instead were quoted annually as a percentage, the current horizon-charge field would not be the correct representation without conversion. Similarly, compounding interest or financing storage payments would require another formula. The lab’s simple conventions are deliberate boundaries, not claims that real merchants use identical financing terms.

Explain what the residual omits

Transport, handling, quality loss, taxes, credit terms, warehouse availability and bid-ask costs can affect a physical comparison. A futures delivery location may differ from the source of the quoted cash material. Operational access is not established by a positive spreadsheet residual, and an apparent opportunity can disappear when those omitted conditions are priced.

Convenience yield is also not directly measured by this residual. The benefit of having usable inventory may matter, but other omitted costs and basis differences can produce the same difference. Label the output residual after specified costs rather than claiming a clean estimate of scarcity value or a riskless trade.

Respect the domain of the formula

The lab permits an absolute price spread even when a supplied price is zero or negative. Relative slopes require both prices to be positive; the simple carry comparison requires a positive near-price proxy. Applying a routine financing percentage to a nonpositive acquisition price would require a defined economic contract rather than a mechanical sign change.

A useful dossier records all cost units, the day-count basis, input date and exclusions. It also preserves the original scenario when assumptions are changed. This approach helps a reader audit a comparison while keeping its output separate from realized futures performance, executable financing or an actual commodity storage service.

Keep in the decision record

• Carry inputs need matching physical units and a day-count convention.
• The default residual is about 0.342466 per unit.
• Omitted costs and delivery constraints prevent an automatic arbitrage claim.

Source notes

1. CME Group — What Is Contango and Backwardation, official education
2. NYMEX Rulebook Chapter 200 — Light Sweet Crude Oil Futures
3. CFTC — Economic Purpose of Futures Markets and How They Work

Source dates and scope matter. Historical inventory observations are retained snapshots; forecasts and synthetic curve assumptions are labelled separately. No investment outcome or product coverage is implied.

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