Carrying charges are the costs to store, insure, and finance the physical possession of the underlying commodity. Unlike securities, commodities like corn, wheat or oil and gold, must be stored somewhere. Additionally, the commodities must be insured in case they are destroyed by a fire or flood. If the user or speculator has borrowed money to purchase the commodity, the finance charges are also considered to be carrying charges.
SecuritiesCE Explains Carrying Charge
Carrying charges have a large impact on the structure of the futures markets. A carrying charge market is one that has distant contracts trading at successively higher prices as the term structure for the contracts move further out. A carrying charge market is also known as a normal market. When taking the series 3 exam you will be faced with a number of questions designed to test your understanding of carrying charges. The exam assumes all commodities held in inventory are purchased using borrowed funds. Carrying charges in most cases will be presented to you in a cost per unit, such as bushel, barrel or ounce. And all carrying charges will be quoted on a per month basis. It will be up to you to determine if it makes more sense to purchase the cash commodity and store it or to purchase a futures contract. The choice that will result in the lowest overall cost is the best answer. Take note, that shipping and transportation charges are not considered to be carrying charges. Check out our great series 3 exam training materials with our greenlight pass guarantee here