[Verse 1]
Picture markets where tomorrow's deals are struck today
Futures locked in concrete numbers, prices set to stay
But how do traders calculate what distant goods should cost?
Without the proper formula, profits can be lost
[Chorus]
Cost of carry builds the bridge from spot to future date
Storage plus the interest rate minus dividends we wait
No arbitrage can flourish when the pricing formula's tight
Forward equals spot times exponential overnight
[Verse 2]
Storage costs accumulate like rent on warehouse space
Insurance, handling, warehouse fees all find their proper place
While dividends and yields subtract from what we'd pay ahead
These income streams reduce the price, flowing cash instead
[Chorus]
Cost of carry builds the bridge from spot to future date
Storage plus the interest rate minus dividends we wait
No arbitrage can flourish when the pricing formula's tight
Forward equals spot times exponential overnight
[Bridge]
Risk-free rate compounds the value through expiration's span
Convenience yield might lower costs for those who need on hand
Currency forwards need two rates, domestic versus foreign ground
Each factor shifts the balance where fair pricing can be found
[Verse 3]
If forwards trade below fair value, arbitrage appears
Buy forward, sell the underlying, pocket what adheres
But when forwards climb too high above theoretical worth
Sell forward, buy the asset, profit from the earth
[Chorus]
Cost of carry builds the bridge from spot to future date
Storage plus the interest rate minus dividends we wait
No arbitrage can flourish when the pricing formula's tight
Forward equals spot times exponential overnight
[Outro]
Markets self-correct through trading, keeping prices fair
Cost of carry shows the pathway, profits hanging in the air