[Verse 1] When you want to buy tomorrow what you can't afford today There's a contract that will lock the price and keep the risk at bay Forward pricing has a formula, it's not just guess and pray Take the spot price, add the carry cost, that's how professionals play [Chorus] Cost of carry, no arbitrage Spot plus interest minus yield Storage costs and dividends These are the factors in the field F equals S times e to the power Of risk-free rate times time Forward pricing made simple Now the formula is mine [Verse 2] Start with today's spot price, that's your foundation stone Add the interest you could earn if cash was yours alone Subtract the dividends you'd miss while waiting for the trade Storage costs get added in, that's how the price is made [Chorus] Cost of carry, no arbitrage Spot plus interest minus yield Storage costs and dividends These are the factors in the field F equals S times e to the power Of risk-free rate times time Forward pricing made simple Now the formula is mine [Bridge] If forward price is too high, sell forward buy the stock If forward price is too low, buy forward and unlock Arbitrage will disappear when prices find their way No-arbitrage principle guides us every day [Verse 3] Higher interest rates will push the forward price up high Lower dividends expected make the forward price fly Storage costs for commodities get added to the sum Convenience yield subtracts away before the pricing's done [Chorus] Cost of carry, no arbitrage Spot plus interest minus yield Storage costs and dividends These are the factors in the field F equals S times e to the power Of risk-free rate times time Forward pricing made simple Now the formula is mine [Outro] Time to maturity matters most The longer wait, the higher cost Forward pricing, now you know Watch those carry factors flow
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