A futures contract’s fair price is tied to the spot price plus the net cost of carrying the underlying asset to delivery — financing and storage push it up, while a convenience yield can pull it back down.
How it works
Adding the risk-free rate and storage cost, then subtracting the convenience yield, gives the net carry rate. Applying that rate over the time to expiry to the spot price gives the fair futures price.
What this does not include
This does not include supply/demand imbalances, seasonal effects on physical commodities, or transaction costs, all of which can cause a real futures price to deviate from the pure cost-of-carry model.
How to use this calculator
- Enter spot price, risk-free rate, storage cost, convenience yield, and time to expiry.
Frequently asked questions
What is contango?
A market condition where futures prices sit above the spot price, typically because financing and storage costs outweigh any convenience yield — the normal state for many financial futures.
What is backwardation?
The opposite condition, where futures prices sit below spot, often because a strong convenience yield (common in commodities during shortages) outweighs financing and storage costs.
Does this model apply to financial futures like stock index futures?
Yes, generally with no storage cost and a dividend yield acting similarly to a convenience yield, pulling the fair futures price below what pure financing cost alone would suggest.
