Chartered Alternative Investment Analyst Association (CAIA) Practice Exam

What are the carrying costs of physical inventory such as a commodity?

1. Transportation fees and trading costs

2. Interest and storage costs

3. Market value depreciation and leasing costs

4. Insurance and handling expenses

The correct answer is: Interest and storage costs

Carrying costs of physical inventory, such as a commodity, primarily include the expenses associated with holding that inventory over a period of time. This encompasses interest costs, which represent the opportunity cost of capital tied up in the inventory, as well as storage costs, which cover the expenses related to physically storing the commodity in a secure location. Interest costs arise because capital invested in inventory could alternatively be used elsewhere, potentially earning returns. Storage costs are related to the facilities, utilities, and labor necessary to maintain the inventory until it is sold. These combined expenses represent the financial burden that businesses incur for maintaining physical inventories. While other options mention relevant costs, they do not encompass the primary carrying costs comprehensively. For instance, transportation fees and trading costs pertain more to the acquisition and movement of inventory rather than holding it. Market value depreciation and leasing costs focus on specific aspects of valuation and rental of space, diverging from the broader concept of carrying costs. Lastly, insurance and handling expenses, while also important, generally fall under operational costs rather than being categorized directly as carrying costs. Thus, the choice emphasizing interest and storage costs accurately reflects the primary components involved in carrying costs of physical inventory.