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Prime brokerage transactions: Difference between revisions
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===[[Margin loan]]=== | ===[[Margin loan]]=== | ||
In order to ''buy'' that share in the shop window, at which you’ve been gazing longingly each day as you pass on your way to and from work, you want to borrow some money. Good news: your broker — now | In order to ''buy'' that share in the shop window, at which you’ve been gazing longingly each day as you pass on your way to and from work, you want to borrow some money. Good news: your broker — whom we will now call a [[Prime broker|“prime” broker]] — will ''lend'' you the wedge. | ||
But there’s a catch: ''first'', you have to pony up [[initial margin]], and if the stock drops in value, you’ll have to pony up ''more'' —and ''second'', you need to give your new shares to the [[prime broker]] so the prime broker can ''play with them''. It does this to offset its costs of lending the money to you in the first place. It will give them back to you only whjen you want to sell them. | |||
===[[Short selling]]=== | ===[[Short selling]]=== | ||
So imagine you want to ''sell'' a share, because you think it is rubbish, but you don’t own it. If only you could do sell what you didn’t own, you could make money if the share went down in value. This is like the ''opposite'' of investing in a share. What you need is someone who will let you ''borrow'' a security they own, that you can sell. When, as you are certain it will, it plummets in value, you can buy another one in the market at the new low price, give it back to your friend, and everyone is happy! You have made a bucket! | |||
That friend is your prime broker. But, again, there is a catch. What if the share goes ''up'' in value? Your prime broker will want [[initial margin]] to cover against that risk. And since it will have to finance the cost of the share it is buying to lend to you, it will want you to pay the proceeds of sale of the shares to it, to reduce that financing cost. | |||
===[[Equity derivative]] (aka [[contract for difference]])=== | ===[[Equity derivative]] (aka [[contract for difference]])=== | ||
Now imagine you wanted to do all the above, but without actually buying or selling any shares at all! Couldn’t you just have a ''derivative'' or some sort, that paid you the same amount that you would have got had you bought or shorted the shares? This is known as “[[synthetic prime brokerage]]”. | |||
{{sa}} | {{sa}} | ||
*[[Prime brokerage charging]] | *[[Prime brokerage charging]] | ||
*[[Prime brokerage]] | *[[Prime brokerage]] | ||