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Synthetic prime brokerage: Difference between revisions
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{{anat|eqderiv}}[[Prime brokerage]] done with [[derivatives]]. So : | {{anat|eqderiv}}[[Prime brokerage]] done with [[derivatives]]. So : | ||
*'''Going long''': instead of buying shares on [[margin]] and asking your [[prime broker]] to hold them for you, you just trade [[a total return swap]] with your [[prime broker]] where the PB pays the return of the share price and you pay a floating rate. The [[PB]] will buy the physical shares and hold them in its own inventory | *'''Going long''': instead of buying shares on [[margin]] and asking your [[prime broker]] to hold them for you, you just trade [[a total return swap]] with your [[prime broker]] where the PB pays the return of the share price and you pay a floating rate. The [[PB]] will buy the physical shares and hold them in its own inventory as a [[delta-one]] hedge. But note it will do this across its whole book, not client-by-client, much less position-by-position.You will be exposed to the price of the assets, but will not have any control or ownership over the {{tag|prime broker}}'s hedge. This can sometimes lead to disappointment when it comes to [[voting]] and [[corporate actions]], but it's all for the best. | ||
*'''Going short''': instead of borrowing shares from your [[PB]] and selling them short in the market, you just trade a [[total return swap]] with your PB, where you pay the return of the share price and the PB pays you a floating rate. Your PB will borrow the shares and sell them short in the market, and will pass on the cost of the borrow to you (by deducting it from the floating rate). | *'''Going short''': instead of borrowing shares from your [[PB]] and selling them short in the market, you just trade a [[total return swap]] with your PB, where you pay the return of the share price and the PB pays you a floating rate. Your PB will borrow the shares and sell them short in the market, and will pass on the cost of the borrow to you (by deducting it from the floating rate). | ||