How Financing and Stock Borrow Costs Affect Equity Forward Prices

Summary

The document explains how financing costs enter an equity forward price through the cost of carrying the stock until delivery. A forward can be understood by comparing its payoff with a position that holds the underlying equity and finances that purchase. The financing rate contributes to the carry cost, while dividends paid during the holding period reduce the net cost. In a simplified expression, the forward price reflects spot plus financing cost minus dividends.

The answers distinguish funding routes: an investor may finance an equity position through repo using the stock as collateral, which can be cheaper than an unsecured loan. That lower funding cost reduces the implied forward price relative to a higher-cost borrowing assumption. The discussion is conceptual and does not provide a full pricing formula for dividend timing, rates, or market frictions. It also does not quantify repo terms or address constraints on stock lending and collateral availability.

Key ideas

• An equity forward reflects the cost of financing the underlying until delivery.
• Expected dividends reduce the forward price relative to a no-dividend carry calculation.
• Repo financing secured by the equity may cost less than unsecured borrowing.
• A lower financing cost reduces the implied forward price.
• The explanation omits detailed conventions and market frictions.

Tags

# Why does cost of borrow have anything to do with the equity forward price?


# Why does cost of borrow have anything to do with the equity forward price?












By non-arbitrage, you buy the stock and hold it to the delivery date of the forward, only cost of funding (of cash) and equity dividend would be involved in the equity forward calculation. Where does cost of borrow come into play?

## Answer by river_rat (score 2)

https://quant.stackexchange.com/a/77232

If you have an asset you can generally fund it cheaper via repo than you could via an uncollateralized loan; that decreases the cost and thus the forward price.

## Answer by user68819 (score 1)

https://quant.stackexchange.com/a/77256

In finance just in general, you always assume you have 0 on day 1. So if I want to replicate a long fwd equity:

I am hypothetically saving me borrowing $x and paying an interest rate (where I collateralise my borrow with the equity). At the same time I am giving up the div on the eq:

Forward price = spot price + interest - dividend

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.