Question

In equity index futures, Cost of Carry formula is:

• A. Storage Cost - Dividends
• B. Interest Cost + Storage Cost
• C. Financing Cost - Dividends
• D. Dividend - Interest Cost
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Hint:

For equity index derivatives, the storage cost is zero. The cost of carry is simply the financing cost of buying the index shares minus any dividends those shares pay.

Answer 1

The Correct Option is C

Step 1: Adapting Cost of Carry for Equity Indices:
Equity indices do not have physical properties, so they do not incur storage, transportation, or insurance costs.

Step 2: Factoring in Financing and Dividends:
• Financing Cost: The interest cost of capital used to purchase the index shares.
• Dividends: Cash distributions received from those shares, which reduce the net cost of holding the position.

Step 3: Formulating the Equation:
Subtracting dividend income from the financing cost yields the net cost of carrying the equity position: $$\text{Cost of Carry} = \text{Financing Cost} - \text{Dividends (C)}$$