Explain the concept of "Cost of Carry" in Futures pricing. Also explain the term Contango and Backwardation markets.

The cost-of-carry model for Futures Contract Pricing, is as under: - Future price = Spot price + Carrying cost – Returns (dividends, etc.) This is also called as Theoretical minimum price or arbitrage free price. The difference between the prevailing spot price of an asset and the futures price is known as the Basis, i.e., Basis = Spot price – Futures price In a normal market, the spot price is less than the futures price (which includes the full cost-of-carry) and accordingly the basis would be negative. Such a market, in which the basis is decided solely by the cost-of-carry is known as a contango market. Basis can become positive, i.e., the spot price can exceed the futures price only if there are factors other than the cost of carry to influence the futures price. In case this happens, then basis becomes positive and the market under such circumstances is termed as a backwardation market or inverted market.