Definition of full transport

What is Full Carry?

Total transportation is a term applied to the futures market and implies that the costs of storage, insurance and payment of interest on a specified quantity of a commodity have been fully accounted for in the last months of the contract compared to the Current month.

Key takeaways

  • Total transportation is the interest, storage, and insurance cost of a product.
  • Total transportation costs provide an explanation of why subsequent contracts are more expensive,
  • Market conditions, driven by supply and demand, can cause prices to move well below or well above total carry.

Understanding complete transportation

The full carry is also known as the “full carry market” or “full carry charge market”, and traders use these phrases to explain a situation where the contract price of the subsequent delivery month equals the price of the nearest month of delivery plus the cost of carrying the underlying commodity between months.

Total maintenance costs include interest, insurance, and storage. This allows traders to calculate opportunity costs, as money tied up in the product cannot earn interest or capital gains elsewhere.

It is reasonable to expect futures markets to have higher priced longer delivery contracts than closer delivery contracts because it costs money to fund and / or store the underlying commodity for that additional period of time. The term that describes higher prices for subsequent contracts is contango. The natural occurrence of contango is expected for those products that have higher costs associated with storage and interest. However, anticipated demand in subsequent months can drive up subsequent contract prices completely independent of maintenance costs.

For example, let’s say product X has a May futures price of $ 10 / unit. If the cost to carry merchandise X is $ 0.50 / month and the June contract is quoted at $ 10.50 / unit, this price indicates a full carry, or in other words, the contract represents the total cost associated with holding the merchandise for an additional month. But if prices in subsequent contracts rose above $ 10.50, this would imply that market participants anticipate higher valuations for the commodity in subsequent months for reasons other than cost of carriage.

Transportation costs can change over time. While warehouse storage costs may increase, interest rates to finance the underlying may increase or decrease. In other words, investors need to monitor these costs over time to make sure their holdings are priced appropriately.

Potential arbitration

Full carry is an idealized concept because what the market sets in a longer futures contract is not necessarily the exact value of the spot price plus the cost of the carry. It is the same as the difference between the trading price of a stock and its valuation using the net present value of the future cash flows of the underlying company. The supply and demand for a stock or futures contract is constantly changing, so prices fluctuate around the idealized value.

In the futures market, longer delivery contracts could trade below close delivery contracts in a condition called backwardation. Some of the possible reasons may be short-term shortages, geopolitical events, and pending weather events.

But even if the longer months are trading higher than the shorter months, they may not represent the exact total carry. This creates business opportunities to take advantage of differences. The strategy of buying one month of the contract and selling the other is called a calendar spread. Which contract is bought and which is sold depends on whether the arbitrageur believes that the market was overvalued or undervalued.

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Mark Holland

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