What does the cost-of-carry model ensure?

The cost-of-carry model is a fundamental concept in derivatives pricing that relates the spot price of an asset to its futures price, taking into account the costs associated with holding (or carrying) the asset until the futures contract's expiration. This model captures the idea that the return on a fully de-leveraged position in a futures contract should equal the return of the underlying asset in normal market conditions.

When a trader enters into a futures contract, they effectively agree to buy or sell an asset at a predetermined price in the future. The cost-of-carry includes expenses such as storage costs, insurance, and financing costs (or the opportunity cost of capital tied up in the investment). According to the model, if you are holding the underlying commodity directly, any return generated should mirror the return from the corresponding futures position when adjusted for these carrying costs.

Thus, the statement highlights that in a well-functioning market where the cost-of-carry is accurately reflected, the returns on the futures contract should be equivalent to those of the underlying asset, assuming no leverage is involved. This ensures consistency in pricing and return expectations across asset classes.

Other options do not accurately represent the implications or conditions of the cost-of-carry model. For example, the guarantee of returns