The futures price and the cash market price are tied together by the ________.

Question

Quizplus · Accepted Answer

The cost of carry is the cost that determines the relationship between the futures price and the cash market price. It takes into account the cost of storing, insuring, financing, and handling the underlying asset until the futures contract expires. The cost of carry is what motivates arbitrageurs to keep the two prices in line with each other. Choosing A or D is redundant as expense of bearing is mentioned twice, and choosing B is incorrect as cost of conveying is not a relevant factor in the relationship between the two prices.

The Futures Price and the Cash Market Price Are Tied