Forgive my lack of math skills... Suppose... s=50 i=.04 n=90/365 d=0 Using the above formula this comes out to be too high?? What do you get? ^ = square root right? 50 * 90/365 * .04 = k seeems to be more acurate = .49 for 90 days of carry.
Sorry, I kind of fucked that up. I went back and got the same right answer you did. My mind was focusing on a some different issues of the cost of carry at the time and didn't properly think through what I was saying. It was very incomplete and the formula was partly wrong. There are several different issues when dealing with cost of carry. Futures cost of carry is complicated. If you are looking for a quick calculation for fair value, the simple formula will do. However, for trading puposes, there is margin rules, volitility of the underlying and of interest rates. Cash comes in and out of your account on a daily basis. This affects how much interest you receive or pay. If you remember from Cottle's book, this is what they were playing on those wash sales when they were accused of inflating volumes. Also, interest rates do fluctuate from day to day. What I was thinking when writing the formula was that the simple one doesn't take into account the compound interest that occurs. This was way over thinking the issue and needless. The difference is not significant. The correct formula would have been, s*(1+i/365)^n, which is .49556. Not a big deal. I was really trying to think through some of problems with the simple cost of carry formula. They exist but some aren't as important as others, especially for the average trader on this board.