The Cost-of-Carry Model is a financial valuation framework used to determine the theoretical fair price of a futures contract or a derivative by accounting for all costs and benefits associated with holding the underlying asset until the contract’s expiration. Within crypto investing, particularly for futures or options on digital assets, this model adjusts the spot price of a cryptocurrency to reflect storage costs, financing rates, and any income generated over a specific period. It provides a basis for arbitrage and pricing efficiency.
Mechanism
The operational logic of the Cost-of-Carry Model involves a computational process that synthesizes several financial variables. It takes the current spot price of the crypto asset, adds the aggregate financing cost of holding the asset, subtracts any yield or income generated from the asset, and factors in any implicit storage costs over the contract duration. For crypto derivatives platforms, this calculation is often automated, providing a real-time theoretical fair value that market makers use to quote prices, and traders use to assess mispricing opportunities.
Methodology
The strategic methodology behind the Cost-of-Carry Model is its application in price discovery and arbitrage in derivatives markets. Its governing principle posits that, in efficient markets, the futures price should converge to the spot price plus the cost of carrying the asset. In crypto trading, this model helps institutional participants identify discrepancies between the theoretical and actual futures prices, enabling systematic trading strategies. It functions as a foundational tool for risk management and for constructing synthetic positions, offering a quantitative reference for fair value.
Pricing a spot-futures RFQ involves deconstructing the package, valuing each leg via market data and carry models, and synthesizing a single, risk-adjusted price.
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