Template:Equity derivative charging

Remember our theory of the game, synthetic PB ninjas: synthetic PB is just margin lending done with swaps. That should offer some clues about how clients pay for it. The economics are the same.

In a physical margin loan — representing a long equity position — the client expects two types of cost:

• Financing: The financing costs it will incur from its prime broker in borrowing the money it needs to buy the stock, and
• Commission: The brokerage commissions it will incur from its equity broker in buying (and when it is ready to, selling again) the stock.

In a short position on margin, the client expects the following costs:

• Financing: The financing costs it will incur from its prime broker in borrowing the security it wants to short, and
• Commission: The brokerage commissions it will incur from its equity broker in selling (and when it is ready to, buying back) the stock it has borrowed.

In either case the client has something it can offer the prime broker to offset its internal funding costs: for a long margin loan, the stock it has bought, which the PB can rehypothecate; for a short position, the proceeds of sale of the stock, which it banks with the PB.