Short selling is the sale of a security that is not owned by the seller. Short seller-
Short squeeze is the situation where short seller is forced to close his position when the borrower runs out of securities to borrow.
SIMILARITIES: Forward & futures contracts:
Assumptions in forward prices:
No transaction cost or short sale restrictions.
Same tax rates.
Borrowing & lending at risk free rate.
Arbitrage opportunities are exploited.
Forward price F0 = S0erT
F0 = (S0 – I)erT = with carrying cost
F0 = S0e(r – q)T = with dividend
Where S0= Spot price
T= Time to maturity
r= risk-free rate
I = carrying cost
q = dividend
INTEREST RATE PARITY: Forward exchange rate , F0 must be related to the spot exchange rate S0 & to the interest rate between the domestic & the foreign currency.
F0= S0 e (r – rf)T
Where, r = risk free rate in domestic country
rf= risk free rate in foreign country
F0 = S0 e ( r + u)T
F0 = S0 e ( r + u – y)T
Delivery options on what, where, when to deliver, choice of bonds that are acceptable to deliver are given to the “short”.
If cost of carrying asset is greater than convenience yield than it is ideal for the “short” to deliver early.
Expectations model: Current futures price for delivery at time T is equal to the expected spot price at time T. If the futures price is less than the expected price, aggressive buying of the futures would push up the futures price. If the futures price is greater than the expected spot rate, aggressive selling of the futures would lead to lower the futures price.
Powered by BetterDocs
Create a new account
Number of items in cart: 0
Enter the destination URL
Or link to existing content