The lease rate is used by the lender of the commodity to calculate the lease payment for lending the commodity to a borrower. The lease rate must be incorporated into the equation to calculate the forward price of the commodity. The forward price of cotton is calculated using the following equation:

$F = S \left( \frac{1 + R}{1 + L} \right)^T$

Where:

• F = forward price
• S = spot price
• R = risk-free rate
• L = lease rate
• T = time to maturity

Thus: F = 37 \left( \frac{1.075}{1.05} \right)^1 = \`$37.88` \text{ per pound}

This formula is used for commodities with lease rates (such as precious metals or agricultural products) where the underlying asset can be lent out. The lease rate effectively reduces the cost of carry, so a higher lease rate relative to the risk-free rate results in a lower forward price relative to the spot price.