Investments, tenth edition

   Pricing with Storage Costs 

 The cost of carrying commodities includes, in addition to interest costs, storage costs, 

insurance costs, and an allowance for spoilage of goods in storage. To price commodity 

futures, reconsider the earlier arbitrage strategy that calls for holding both the asset and a 

short position in the futures contract on the asset. In this case we will denote the price of 

the commodity at time  T  as  P  

 T 

 , and assume for simplicity that all noninterest carrying costs 

( C ) are paid in one lump sum at time  T,  the contract maturity. Carrying costs appear in the 

final cash flow.