Stock Futures Backwardation and the Cost of Borrowing Shares
Summary
This discussion examines why a stock’s futures can trade below its spot price even when the company pays no dividends. It starts with cost-of-carry pricing and asks whether heavy demand to hedge stock holdings could explain the gap. The responses point to the economics of borrowing shares: when short sellers are willing to pay a large premium to locate and hold lendable shares, stock owners may receive a rebate that changes the futures fair value and can produce backwardation.
The example concerns a Polish company and describes a history of severe price decline and market concern about its survival. The answers argue that the apparent gap does not automatically offer arbitrage: a trader shorting spot must account for the cost or benefit of borrowing shares, and that cost can remove the expected profit. The explanation is specific to securities lending conditions and the company discussed; it is not a general claim that backwardation signals distress or that every spot-futures gap is non-arbitrageable.
Key ideas
- Futures fair value reflects financing, dividends, and the economics of holding the underlying.
- A scarce or costly stock borrow can alter the carry relationship and push futures below spot.
- Share lending rebates can benefit stock holders when short sellers compete to borrow shares.
- A spot-futures price gap is not an arbitrage unless stock borrowing costs and availability are included.
- The cited company example links backwardation to market concerns, but does not establish a universal rule.
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Full text
# Why is stock futures price much lower than spot? # Why is stock futures price much lower than spot? What might be the reason for a futures price on a stock being much lower than the spot, i.e. stock price? Spot = 8.30 Futures M17 = 7.45 U17 = 7.23 The company does not pay dividends. No-arbitrage pricing would suggest negative financing cost: F(t) = S(t) * exp((risk-free_rate - dividend_yield)*(T-t)) Can this be explained by an extraordinary demand for hedging spot positions via shorting futures? Completing the answer with stock quotes (this is a very popular Polish company with around 6 bn USD of asset value): https://stooq.pl/q/?s=pxm&c=10d&t=b&a=lg&b=0 8,19 https://stooq.pl/q/?s=fpxmm17&c=10d&t=b&a=lg&b=0 7,67 https://stooq.pl/q/?s=fpxmu17&c=10d&t=b&a=lg&b=0 7.45 ## Answer by amdopt (score 2, accepted) https://quant.stackexchange.com/a/33659 > Can this be explained by an extraordinary demand for hedging spot positions via shorting futures? The answer to your question is: kind of but there is more to it. Out of curiosity I looked into this a bit after you added the company name. The answer is similar to @will answer above but it was too much to add as an edit, hence, the separate answer. This stock has went from PLN500/shr down to single digits. Currently trading PLN~8.60. Those numbers are adjusted for a 1:50 split in 2015. When comparing the current price of a stock to it's future price, you need to adjust spot for dividends and cost of owning the stock (search for Fair Value if an explanation is needed). Owners of this stock have not received a dividend since 2012 and are currently receiving a rebate (not being charged interest) for owning shares--i.e. Short sellers are so sure this stock is going to zero that they are willing to pay an astronomical amount for someone else to buy, hold and loan them shares. That premium for the owner (cost for the short seller) is the difference between spot and future. This is an instance where market participants are literally saying "I wouldn't buy that stock if you paid me to!" Though the curve has shifted a bit since your original post, the backwardation is existing because no one has any faith in this company remaining a going concern (at the moment). Oftentimes a backwardated curve can lead to an arbitrage opportunity, however, not in this case. The arb is executed by shorting spot and buying future. For an arb to exist, the current price minus the borrowing cost for a short seller must be greater than the future price--it is not. There is no arb--just a poorly managed company that no one has any faith in. Anyone interested in the -ve rate being paid to share holders can use this formula (assume the future price = fair value price) and solve for r. http://www.cmegroup.com/trading/equity-index/fairvalue.html ## Answer by will (score 3) https://quant.stackexchange.com/a/33566 Say we are living in a world where the risk free rate is zero, and we have a stock that pays no dividends. It's worth 100 today. It's expected value in 1 year is also 100. Now lets introduce some risk. Let's say this stock has a 50% chance of defaulting. If it defaults, you'll get some of your money back, but not all of it. Given this new information, would you happily agree to buy the stock a year from now for £100? Or would you rather pay 50% * 100 + 50% * (however much you believe you can recover)?
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