1.4. Structure of the Futures Market

Usually, the price of futures contracts for any particular asset becomes progressively more expensive as the expiration months extend into the future. In other words, the longer the contracts are, the more expensive they are. The increasing price reflects the additional carrying charges of the asset. Carrying charges are simply the cost of holding an asset. For an agricultural commodity, the cost of carry will include storage and insurance costs. In the capital markets, the cost of carry might refer to the interest charged on funds that are borrowed to purchase the contract. Carrying charges are generally incorporated into the price of a commodity futures contract.

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