That is, if a person can purchase a good for price S and conclude a contract to sell it one month later at a price of F, the price difference should be no greater than the cost of using money less any expenses (or earnings) from holding the asset; if the difference is greater, the person has an opportunity to buy and sell the "spots" and "futures" for a risk-free profit, i.e. an arbitrage.
When the condition is consistently not met for a given asset, the implication is that some condition of the market prevents effective arbitration; possible reasons include high transaction costs, regulations and legal restrictions, low liquidity, or poor enforceability of legal contracts.
Alternatively, r can be seen as the net total cost of carrying (that is, the sum of interest, dividends, convenience and storage).
[1] Simplified form: Existing futures contracts can be priced using elements of the spot-futures parity equation, where
is the (expected) value of the existing contract today:[citation needed] which upon application of the spot-futures parity equation becomes: Where