Commodity prices behave differently from stock prices in one fundamental respect: you can own a barrel of oil or a tonne of wheat, but storing it costs money, it spoils, and it may be genuinely useful to hold right now — a value that a futures contract cannot replicate. These three facts — storage cost, perishability, and convenience yield — deform the simple cost-of-carry relationship that applies to financial assets.
This topic builds the commodity cost-of-carry framework from the ground up. It starts with the physical reality of different commodity markets — how crude oil, natural gas, metals, and agricultural products are produced, stored, traded, and consumed. It then introduces the theory of storage: the idea that the forward price encodes not only financing costs but also the shadow value of physical inventory. Finally, it applies the framework to real hedging problems: how an oil producer uses futures to lock in revenue, how an airline hedges jet fuel costs, and how a grain processor protects margins.
In this lesson
- Prerequisites
- Contents
- The big picture
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