How Stock Borrow Costs Affect Equity Forward Prices

Summary

The document explains why a higher stock-borrow fee lowers a stock forward price relative to spot plus financing. Cash financing and the cost of borrowing shares enter the forward relationship in opposite directions. A useful intuition is that lending out owned shares earns a borrow fee, which behaves like income from holding the stock; the holder who finances a margined position pays the cash interest rate.

The answer gives a qualitative explanation rather than a derivation or numerical example. It frames the effect in the context of a stock squeeze, when share borrowing becomes expensive, and notes that the forward can then sit below spot adjusted for financing. The discussion does not specify a full pricing formula, contract conventions, or other costs such as dividends, taxes, or collateral terms, so the intuition should be applied within the relevant market setup.

Key ideas

• Cash interest and stock-borrow fees affect forward pricing in opposite directions.
• A stock lender can receive the borrow fee, making it similar to income earned by holding the shares.
• Higher share-borrow costs tend to depress the forward price relative to spot plus financing.
• The explanation is qualitative and omits contract-specific costs and conventions.

Tags

# Why does increased stock borrow costs decrease a stock's forward price?


# Why does increased stock borrow costs decrease a stock's forward price?












The author in this article -- http://streetwiseprofessor.com/?p=7294 -- states that an increase in stock borrowing costs decreases a stock's forward price:

> In the absence of manipulation, the forward price of a stock should be the current spot price plus the cost of financing the position at the prevailing interest rate until the delivery date on the forward. In the absence of a squeeze, the cost/fee to borrow the stock should be small. However, in a squeeze, it is costly to borrow the stock: the bigger the squeeze, the bigger the cost of borrowing. This borrowing cost depresses the forward price. Thus, during a squeeze, the forward price is below the spot price plus financing costs.

But why? Shouldn't the effect be similar to increased dollar financing rates, namely an increase in the forward price?

## Answer by nbbo2 (score 4, accepted)

https://quant.stackexchange.com/a/19308

The rate of interest on cash and the cost of borrowing the stock work in opposite directions. Think of the cost of borrowing the stock as a kind of "dividend" that the stock pays off to its holders. As a stock owner you receive this amount [if you lend the shares] while you pay the interest rate if you hold the stock on margin.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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