Template:Equity derivative charging: Difference between revisions

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 *'''[[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]] [[commission]]s it will incur from its equity broker in buying (and when it is ready to, selling again) the stock.
-To offset its costs, the [[prime broker]] can [[rehypothecate]] the stock, which it holds in custody for the client. Now when it does so, the [[PB]] does not take ''[[price risk]]'' to the stock: remember; it does not have a directional view on the stock. So it will not sell the stock outright, but more likely will use it as collateral in the market, to raise cash (under a [[repo]]) or high-quality assets (under a stock loan). If the stock increases in value, happy days for all concerned: the [[PB]] will receive more cash, and at the limit may reach its rehypothecation limit and have to return some of the rehypothecated stock to the client. If the stock declines in value, the [[PB]] will be able to raise less cash against it, but will be able to call for more margin from the client.
+:To offset its costs, the [[prime broker]] can [[rehypothecate]] the stock, which it holds in custody for the client. Now when it does so, the [[PB]] does not take ''[[price risk]]'' to the stock: remember; it does not have a directional view on the stock. So it will not sell the stock outright, but more likely will use it as collateral in the market, to raise cash (under a [[repo]]) or high-quality assets (under a stock loan). If the stock increases in value, happy days for all concerned: the [[PB]] will receive more cash, and at the limit may reach its rehypothecation limit and have to return some of the rehypothecated stock to the client. If the stock declines in value, the [[PB]] will be able to raise less cash against it, but will be able to call for more margin from the client.
 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
+*'''[[Financing]]''': The financing costs it will incur from its [[prime broker]] under the [[stock loan]] by which it borrows the security it wants to short, and
 *'''[[Commission]]''': The [[brokerage]] [[commission]]s it will incur from its equity broker in selling (and when it is ready to, buying back) the stock it has borrowed.
+:Here the client also has something it can offer the prime broker to offset its internal funding costs: the proceeds of sale of the borrowed stock, which it banks in its cash account with the [[PB]]. That has the effect or reducing its overall indebtedness. Now its exposure moves around under the [[stock loan]] with the [[prime broker]]. If the stock increases in value, the client’s liability under the [[stock loan]] also increases, and the [[PB]] will call for margin. If the stock decreases in value, happy days for all concerned: the [[PB]] will receive more cash, and at the limit may reach its rehypothecation limit and have to return some of the rehypothecated stock to the client. If the stock declines in value, the [[PB]] will be able to raise less cash against it, but will be able to call for more margin from the client.
-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.
 ===Costing of [[synthetic prime brokerage]]===