Hedging, Speculation and Arbitrage using Futures.ppt

WEKFDKSF

1. Hedging, Speculation and Arbitrage using Futures

2. Introduction
Futurescontractshavelinearorsymmetricalpayoffs.
Insimplewordsitmeansthatthelossesaswellasprofitsforthebuyerandthe
sellerofafuturescontractareunlimited.
Theselinearpayoffscanbecombinedwithoptionsandtheunderlyingassetto
generatevariouscomplexpayoffs.

3. Payoff for a long future contract
Thepayoffforapersonwhobuysafuturescontractcanbecompared
tothepayoffforapersonwhoholdsanasset.
Thereisunlimitedupsideaswellasdownsiderisk.
Takethecaseofaspeculatorwhobuysathree(far)monthALtd.futurescontractat
₹750.TheunderlyingassetinthiscaseistheshareofALtd.Whentheshareprice
movesup,thelongfuturespositionstartsmakingprofits,andwhentheshareprice
movesdownitstartsmakinglosses.

4. Figure below shows the payoff diagram for the buyer of a futures contract.
Thefigureshowstheprofits/lossesforalongfuturesposition.
TheinvestorboughtfutureswhentheshareofALtdwasat
₹750.
Ifthesharepricegoesup,hisfuturespositionstartsmaking
profit.Ifthesharepricefalls,hisfuturespositionstartsshowing
losses.

5. Payoff for a short future contract
Thepayoffforapersonwhosellsafuturescontractissimilartothepayofffor
personwhoshortsanasset.Herealso,thereisunlimitedupsideanddownsiderisk.
Takethecaseofaspeculatorwhosellsathree-monthALtd.futurescontractwhenthe
sharepriceis₹750.TheunderlyingassetinthiscaseistheshareofALtd.
Whenthesharepricemovesdown,theshortfuturespositionstartsmakingprofits,
andwhenthesharepricemovesup,itstartsmakinglosses.

6. Figure below shows the payoff diagram for the seller of the futures contract.
Thefigureshowstheprofits/lossesforaShortfuturesposition.
TheinvestorsoldfutureswhentheshareofALtdwasat₹750.
Ifthesharepricegoesup,hisfuturespositionstartsmaking
losses.Ifthesharepricefalls,hisfuturespositionstartsshowing
profits.

7. Ascanbeseenfromabovediagrams,payoffforlongfutureiscompletelyoppositeofshortfuture,
thereforewecanconcludethatwhateveristheprofitofaninvestorholdinglongfutureislossofaninvestor
holdingshortfutureforthesameunderlyingassetandviceversa.
Therefore,wealsocallfuturestobeazerosumgame.

8. Long Hedge using futures
Alonghedgeisasituationwhereinvestorenterintoabuyingcontractfora
particularshare/commodity/currencytoprotectyourselfagainstfutureprice
volatilityorfluctuation.

9. TounderstandthistakeexampleofanIndianimporter
whoneedstomakepaymentinUSDollar($)three
monthsfromtoday,hewouldliketoeliminatetherisk
ofUSDollar($)fluctuatingagainstIndianRupee(₹)
byenteringintoalongfutureforUSDollar($),thusa
longhedgeisbeneficialforapersonwhoknowshehas
topurchaseanassetinthefutureandwantstolockinthe
purchasepricetodayitself.
Alonghedgecanalso
beusedtohedge
againstashortposition
thathasalreadybeen
takenbytheinvestor.

10. Short Hedge using futures
Ashorthedgeiscompletelyoppositetolonghedge.Itisaninvestment
strategythatisfocusedonmitigatingariskthathasalreadybeentaken.
Here“shorthedge”isthetermusedforanactofshortingasecurityin
futuresmarket;itisusuallyaderivativescontractthathedgesagainst
potentiallossesinaninvestmentthatisheldlong.

11. Shorthedgingisoftenusedintheagriculture
business,forexample,afarmerwouldliketoenter
intoashortfuturescontractforhisproducetolock
inthepricehewillgetforthesameandhence
eliminatehisriskagainstanypricefluctuation.

12. Institutionalmoneymanagersoftenuseshorthedgeson
interestrateswhentheyhavealotoffixed-income
investmentsandworryabouttheriskofreinvestingatlower
ratesinthefuture.
Thishelpsprotecttheirportfoliofrompotentiallossesdueto
interestratechanges.

13. Shorthedgesarealsousedbyexportersincurrencyderivativemarkets,herea
exporterentersintoashortfuturescontractfortheforeigncurrencythatheis
goingtoreceivesometimeinfutureforthegoodsexportedbyhimtoday.
Bydoingso,theexporterwillbeabletolockinhisprofitirrespectiveof
exchangeratefluctuationinfuture.
Ifashorthedgeisexecutedwell,gainsfromthelongpositionwillbeoffsetbylossesinthederivativesposition,andviceversa.

14. PERFECT & IMPERFECT HEDGE USING FUTURES
Perfect hedge using futures
Aperfecthedgeistheonethatcompletelyeliminatesthefutureprice
fluctuationrisk,hereaninvestorentersintoexactlyoppositecontractin
futuremarketascomparedtohispositioninthecashmarket.
Butinreallifeachievingaperfecthedgeisnearlyimpossible.
Tounderstandwhyitisimpossibletoachieveaperfecthedgeweneedtorecallthefactthatfuturescontractarevery
standardizedinnatureintermsofunderlyingasset,contractsize,tradingcycles,
settlementdate,settlementbasis,settlementprice,etc.

15. PERFECT & IMPERFECT HEDGE USING FUTURES
Imperfect hedge using futures
Animperfecthedgeistheonethatisnotabletocompletelyeliminatethefuturepricefluctuationrisk.
Asdiscussedintheaboveslide,thishappensinfuturesmarketmainlybecausefuturecontractsare
standardizedinnatureintermsofvariousaspectslikeunderlyingasset,contractsize,tradingcycles,
settlementdate,settlementbasis,etc.

16. Reasons for Imperfect Hedge
1. Underlying asset
2. Contract size
3. Trading cycles
4. Settlement date

17. 1. Underlying asset
Sometimesafuturecontractmaynotbeavailableforaparticular
underlyingassetinwhichaninvestorholdsapositioninthecashmarket,in
suchacasetheinvestormaybeforcedtoenterintoacrosshedge*.
Cross hedge refers to hedging ones position by taking an opposite position in some other underlying
with similar price movements.

18. Acrosshedgeisperformedwhenaninvestorwhoholdsalongorshortpositioninan
underlyingassettakesanopposite(mayormaynotbeequal)positioninsomeother
underlyingasset,inordertolimitbothup-anddown-sideexposurerelatedtotheholdingsin
initialunderlyingasset.
Althoughthetwounderlying(cashandfuture)assetsmaynotbeidentical,theyare
correlatedenoughtocreateahedgedpositionaslongasthepricesmoveinthesame
direction.Anexampleofcrosshedgingwouldbeaninvestorenteringintoashortcrudeoil
futurestohedgehisshortpositioninnaturalgas.Here,thepricesofnaturalgasandcrudeoil
maynotbeidentical,butmaybesimilarenoughforusingthesameforhedgingpurpose.
Asthepricesoftwodifferentunderlyingassetsarenotidentical,theydon’tfullyconverge
onthesettlementdateleadingtobasisriskhenceleadingtoanimperfecthedge.

19. 2. Contract size
Thishappenswhencurrentpositioninanunderlyingassetdoesnotperfectly
matchwiththefuturescontractintermsofquantityoftheunderlyingasset.
Forexample,anexportermaybeduetoreceiveUSDollar($)1,05,600three
monthsinfuture,butafuturecontractforUSDollar($)maybeavailablewitha
contractsizeofUSDollar($)10,000.
Insuchacasetheexporterwilleitherberequiredtoenterintoashortpositionfor
10or11futurecontractbothofthembeingnotaperfectmatchwiththeposition
incashmarketleadingtoimperfecthedge.

20. 3. Trading cycles
Futures on most of the stock exchanges are available for a cycle of one, two
or three months. If an investor wants futures contract a longer or a shorter
duration he may again end up having an imperfect hedge.

21. 4. Settlement Date
Thishappenswhenfuturescontractsettlementdatedoesnotperfectlymatchwiththesettlementdateofunderlyingasset.
Forexample,animportermayberequiredtopayUSDollar($)1,10,000on18
th
August2023butafuturecontract
isavailablewithasettlementdateofmonthendandacontractsizeofUSDollar($)10,000.Herecontractsizemay
perfectlymatchwiththerequirementintheformofgoinglongfor11futurecontracts,butthesettlementdatemay
notmatchwiththerequirementleadingtoimperfecthedge.
As the prices of the underlying asset may not match on two different dates, they don’t fully converge leading
to basis risk hence leading to an imperfect hedge.

22. SPECULATION USING FUTURES CONTRACT
Speculators are the people who take a view of the market or an asset and would like to make profits using the same.
They don’t have any holdings in the cash market for the said asset and therefore they assume a lot of risk while entering into the futures market.
Revision before going to Start Case Study

23. Case Study A [Bullish Security, Buy Futures]

24. Case Study A [Bullish Security, Buy Futures]
Let us further assume that contract size for Bosch Ltd is 25 shares in the futures market.
And a margin of 20% is required to trade in futures. Finally let us assume that Mr. M’s (Speculator) speculation proves correct
at the end of three months, in such a case Mr. M will be able to make profit in futures market as follows:
S.No. Particulars ₹
1. Value per share of Bosch Ltd. for a three
months future contract
22,600
2. Enter into a long future for Bosch Ltd.
[ ₹22,600 X 25]
5,65,000
3. Pay the margin [₹5,65,000 x 20%] 1,13,000
4. Spot price per share at end of three months24,000
5. Profit per share [4 —1] 1,400
6. Profit for one futures contract [1,400 x 25
shares]
35,000
7. Profit Percentage [35,000 / 1,13,000 X 100] 30.97%

25. Case Study A [Bullish Security, Buy Futures]
Alternate Strategy,
As against this if Mr. M would have wanted to make profit through cash market operations his profit would have been as follows:
S.No. Particulars ₹
1. Value per share today in cash market 21,970
2. Purchase 25 shares in cash market 5,49,250
3. Spot price per share at end of three months 24,000
4. Profit per share [3 -1] 24,000 –21,970 2,030
5. Profit for 25 shares [2,030 x 25 shares] 50,750
6. Profit percentage [50,750/5,49,250 x 100] 9.24%

26. Case Study A [Bullish Security, Buy Futures]

27. Case Study A [Bullish Security, Buy Futures]
S.No. Particulars ₹
1.
Value per share of Bosch Ltd. for a three months future contract 22,600
2.
Enter into a long future for Bosch Ltd. [22,600 x 25] 5,65,000
3.
Pay the margin 15,65,000 x 20%] 1,13,000
4.
Spot price per share at end of three months 21,000
5.
Loss per share [4 —1] 1,600
6.
Loss for one futures contract [1,600 x 25 shares] 40,000
7.
Loss Percentage [40,000/ 1,13,000 X 100] 35.39%

28. Case Study A [Bullish Security, Buy Futures]
S.No. Particulars ₹
1. Value per share today in cash market 21,970
2. Purchase 25 shares in cash market 5,49,250
3. Spot price per share at end of three months 21,000
4. Loss per share [3 —1] 970
5. Loss for 25 shares [970 x 25 shares] 24,250
6. Loss percentage [24,250/5,49,250 x 100] 4.42%

29. Case Study A [Bullish Security, Buy Futures]
Therefore, one should understand the fact that speculation in futures market is highly levered leading to huge up side and down side
riskmaking them a very risky venture.

30. Case Study B [Bearish Security, Sell Futures]

31. Case Study B [Bearish Security, Sell Futures]
LetusfurtherassumethatcontractsizeforBoschLtdis25sharesinthefuturesmarket.
Andamarginof20%isrequiredtotradeinfutures.
FinallyletusassumethatMr.X’sspeculationprovescorrectattheendofthreemonths,insuchacaseMr.Xwillbeabletomake
profitinfuturesmarketasfollows:
S.No. Particulars ₹
1.
Value per share of Bosch Ltd. for a three months future contract22,600
2.
Enter into a SHORT future for Bosch Ltd. [22,600 x 25]5,65,000
3.
Pay the margin [5,65,000 x 20%] 1,13,000
4.
Spot price per share at end of three months 20,000
5.
Profit per share [1 —4] 2,600
6.
Profit for one futures contract [2,600 x 25 shares] 65,000
7.
Profit percentage [65,000/1,13,000 x 100] 57.52%

32. Case Study B [Bearish Security, Sell Futures]
Intheabovetable,theprofitdependsontheclosingpriceofthesecurityin
thespotmarketonthesettlementdate,thereforetheprofitshownaboveis
notcertainorassured,butistotallyspeculativeandcanbemoreorless
thantheamount.

33. Question on Long Hedge –Case Study of INFOSYS
The Infosys Ltd.’s shares currently on 1st July 2023 is trading on NSE @ Rs. 950 per share.
Mr Shubham, an investor is of the view that price of shares of Infosys Ltd is likely to fall to
Rs. 800 by 30
th
September 2023. September Futures Contract on shares of Infosys Ltd. is
available today @ Rs. 850 per share. The bank’s prevailing lending interest rate is 12% p.a.
and deposit interest rate is 10% P.A. Brokerage & Other Transaction costs on Futures and
Spot transaction is 1%. Mr Shubham sees an opportunity to make risk less profit.
Show cash flows of the hedge strategy that Mr. Shubham can adopt to make riskless profit
and also show the cash flows, if Mr Shubham does not adopt hedge strategy.

34. Mr.ShubhamwilladoptLongHedgestrategyinfuturesrisklessprofit.
TheMrShubhamwillcarryoutfollowingstepstomakerisklessprofit.
STEPNO.1:
Mr.ShubhamwillborrowsharesofInfosysLtdforaperiodofthreemonthsand
Sellthemtodayi.e.,1
st
[email protected].
Since Mr Shubham has borrowed shares, he has liability of returning those share
to the lender of shares by 30th September 2023, thus M. Shubham is said to be
having ‘Short Position’ in shares of Infosys Ltd.

35. StepNo.2:Mr.ShubhamwillLongHedge’futuresonInfosysLtd.
Thatis,MrShubhamshallbuySeptemberFuturesonInfosysLtdshares@Rs.
850pershare,soastocovertheliabilityofreturningthesharesborrowedin
StepNo.1

36. The cash flows of Mr Shubham’s Hedge Strategy in different price scenario will be as under.
PARTICULARS
SPOT PRICE SCENARIO ON 30
th
SEPTEMBER 2023
Rs. 800 Rs. 950 Rs. 1,100
(A) Cash Flows on 1
st
July 2023
1 Borrow Shares @ lending rate of 12% p.a. on
Spot Price on 1
st
July 2023 & Sell
immediately in Spot Market
950 950 950
2. Brokerage and Other Transaction Cost on
Spot Sell @ 1%
(9.50) (9.50) (9.50)
3. Buy September Future Contract on 1
st
July
2023 @850 by paying initial margin of say
10%
(85.00) (85.00) (85.00)
4. Brokerage and Other Cost on Futures @ 1%
on 850
(8.50) (8.50) (8.50)
5 Cash Balance
847 847 847
6. Deposit Cash Balance in Bank, say @10%
p.a.
(847) (847) (847)
Net Cash Balance on 1
st
July 2023
0 0 0

37. PARTICULARS SPOT PRICE SCENARIO ON 30
th
SEPTEMBER 2023
Rs. 800 Rs. 950 Rs. 1,100
(A)Cash Flows on30
th
September 2023
1 DepositMatured –Principal 847 847 847
2. Interest on Deposit@ 10% for 3 Months i.e.,
[847 X (1 + 0.10)¼]
20.42 20.42 20.42
3. Maturity Value 867.42 867.42 867.42
4. Settlementof Futures = Future Price Rs. 850
–Initial Margin Rs. 85 (10% of 850) = 765
(765) (765) (765)
5 Cash Balance 102.42 102.42 102.42
6. Pay Interest on Borrowed Shares @ 12%p.a.
on 950 [950 X (1 + 0.12)¼]
(27.30) (27.30) (27.30)
7. Net Cash Balance on 30
th
September2023 75.12 75.12 75.12
Net Cash Flows on 30
th
September 2023

38. Interpretation
Thus,byadoptingLongHedgeStrategyMr.Shubhamwill
earnrisklessProfitofRs.75.12pershareirrespectiveofSpot
Priceincreasingordecreasingorremainingunchanged.

39. Cash Flows of Mr. Shubham in different Spot Price Scenario when he does not
adopt Long Hedge Strategy
PARTICULARS
SPOT PRICE SCENARIO ON 30
th
SEPTEMBER 2023
Rs. 800 Rs. 950 Rs. 1,100
(A) Cash Flows on 1
st
July 2023
1 Borrow Shares @ lending rate of 12% p.a. on
Spot Price on 1
st
July 2023 & Sell
immediately in Spot Market
950 950 950
2. Brokerage and Other Transaction Cost on
Spot Sell @ 1%
(9.50) (9.50) (9.50)
3. Cash Balance
940.50 940.50 940.50
4. Deposit Cash Balance in Bank, say @10%
p.a.
(940.50) (940.50) (940.50)
Net Cash Balance on 1
st
July 2023
0 0 0

40. Cash Flows of Mr. Shubham in different Spot Price Scenario when he does not
adopt Long Hedge Strategy (Continue)
PARTICULARS
SPOT PRICE SCENARIO ON 30
th
SEPTEMBER 2023
Rs. 800 Rs. 950 Rs. 1,100
(A)
Cash Flows on 30
th
September 2023
1.
Deposit Matured –Principal
Rs. 940. 50Rs. 940. 50Rs. 940. 50
2.
Interest on Deposit @ 10%p.a. for 3 Months
[940.50 X (1 + 0.10)¼]
Rs. 22.67Rs. 22.67 Rs. 22.67
3.
MaturityValue
963.17 963.17 963.17
4.
Buy Shares in Spot Market to return Borrowed Shares
(800) (950) (1,100)
5.
Cash Balance
163.17 13.17 (136.83)
6.
Pay Interest on Borrowed Shares @ 12% p.a. on 950 [950 X
(1 + 0.12)¼]
(27.30) (27.30) (27.30)
7.
Net Cash Balance on 30
th
September 2023
Profit / (Loss)
135.87 (14.13) (164.13)

41. Thus,MrShubhamifdoesnotadoptlonghedgestrategy,hewill
incurlossifspotpriceincreasesonmaturityandwhenthereisno
changeinspotpriceonmaturity.
Heshallmakeprofitonlyifpricedecreasebymorethanthe
brokerageamountplusthenetinterestamounti.e.Rs.9.50+(27.30
-22.67)=Rs.9.50+4.63=Rs.14.13

42. Short Hedge
An entity having long position or likely to have long position in underlying would need to take
short position in futures market so as to manage the price risk. Therefore, when one hedges
with short position in futures it is referred to as Short Hedge.
Thus, Short Hedge means means a short position in futures.
By futures market an entity can freeze the price risk of underlying hedging
which it is long.
The basic objective behind short hedge is to retain value of underlying and
not to make any gains from fluctuation in the value.

43. Investment Portfolio of AMFI consists of 1,000 shares of Tata Steel Ltd.
Today, 1st July 2023, the spot market price is Rs. 500 per share.
Thus, the portfolio value of AMFI as on 1st July 2023 is Rs. 5,00,000.
AMFI is of the view that the share price of Tata Steel will decrease by 15% by
the end September 2023.
AMFI intend maintain the portfolio value at minimum Rs. 4,75,000.
The September Futures on Tata Steel is available for Rs. 480. The brokerage
and other transaction cost on futures contract is 1%. Explain how AMFI can
maintain the portfolio value of minimum Rs. 4,75,000.

44. PARTICULARS
LIKELYSEPTEMEBER PRICE SCENARIO
July Rs. 450 Rs. 500 Rs. 550
1. Short 1000 Shares in Future Contract @ Rs.
480
4,80,000 4,80,000 4,80,000
1. Brokerage on Futures @ 1% (4,800) (4,800) (4,800)
Septemb
er
30
th
Settlement of Future Contract at Spot Price (4,50,000) (5,00,000) (5,50,000)
30
th
Profit/ (Loss) in Future Contract = Cash
Inflow / Outflow
25,200 (24,800) (74,800)
30
th
Value of Shares held in the Portfolio 4,50,000 5,00,000 5,50,000
30
th
Value of Portfolio in September 4,75,200 4,75,200 4,75,200

45. ARBITRAGE USING FUTURES
Arbitrageursinfuturesmarketarethepeoplewhotakeadvantageofprice
differencebetweencashmarketandfuturesmarket.Arbitrageurstaketwo
positions,oneincashmarketandotherinfuturesmarketdependingonthe
pricedifferencestomakeriskfreeprofits.

46. ARBITRAGE USING FUTURES
Earlier,westudiedthatpricingoffuturesisbasedoncost-of-carrymodelandifthepricing
doesnotmatchwithcostofcarryarbitrageurscanmakeriskfreeprofitsbytaking
advantagesofpricedifferences.Now,aspercost-of-carrymodelfuturespriceofanon-
dividendpayingsecurityshouldbe,
Whereas.
S=Spotprice
r=Costoffinancing(usingcontinuouslycompoundedinterestrate)
t=Timetillexpirationinyears
e=2.71828(Euler’snumberorinsimplewords,amathematicalconstant)

47. ARBITRAGE USING FUTURES

48. ARBITRAGE USING FUTURES
ForExample:SecurityABCLtdtradesinthespotmarketat₹1170.Moneycanbeinvestedat11%p.a.
TheTheoreticalvalueofaone-monthfuturescontractonABCiscalculatedasfollows:

50. CASH AND CARRY ARBITRAGE STRATEGY
Inotherwords,Cashandcarryarbitrageisanarbitragestrategywhereinanarbitrageur
createsaportfolioofalongpositioninanassetsuchasastockorcommodity,andashort
positioninthesameunderlyingfutures.
ImportantNote:Thisstrategyseekstoexploitpricinginefficienciesforthesameassetin
thecash(orspot)andfuturesmarkets,inordertomakeriskfreeprofits.Thearbitrageur
typically‘carries’theassetuntiltheexpirationdateofthefuturescontractandthesameis
deliveredagainstthefuturescontractonsuchexpirationdate.

51. Therefore,forexamplementionedabovewewillusecashandcarry
arbitrageifshareofABCLtd.todayis1,170andisbeingtraded
theoreticallyabove1180.53inonemonth’sfuturemarket.
SaytheshareofABCLtd.intheexchangeisbeingtradedat1,200/-
foronemonthfuture,anarbitrageurcanmakeriskfreeprofit.

52. S.No. Particulars ₹
1.
Borrow cash today + ₹ 1,170
2.
Purchase one share of ABC Ltd. from cash market [i.e. take a
long position in cash market]
-₹ 1,170
3.
Enter into a one month futures contract to sell the share of
ABC Ltd. at 1,200/-per share [i.e. take short position in futures
market]
4.
Sell the share after one month as per the futures contract [See
Point No. 3]
+ ₹ 1,200
5.
Re-pay the money borrowed in point 1 above with interest-₹ 1,180.53
6.
Risk free profit [4—5] + ₹ 19.47

53. Reverse Cash & Carry Arbitrage
Asthenamesuggests,thisstrategyisoppositeofcashandcarryarbitrage.

54. In other words, reverse cash and carry arbitrage is an arbitrage strategy wherein
an arbitrageur creates a portfolio of a short position in an asset such as a stock or
commodity, and a long position in the same underlying futures.
Thisstrategyseekstoexploitpricinginefficienciesforthesameassetinthe
cash(orspot)andfuturesmarkets,inordertomakeriskfreeprofits.
Thearbitrageurtypically‘sells”theassettodaytoinvestthefundsandgeta
higherinflowonfuturesettlementdateascomparedtothepriceheisrequired
topaytopurchasethesameshareinthefuturesmarketmakingriskfreeprofit
whiledoingso.

55. Therefore,forexamplementionedabovewewillusereversecashandcarry
arbitrageifshareofABCLtd.isbeingtradedbelow₹1180.53inonemonth’s
futuremarket.
Say the share of ABC Ltd. is being traded at ₹ 1,175/-for one month future, an
arbitrageur can make risk free profit as follows.

56. S.No. Particulars ₹
1.
Borrow Shares under SLBS Scheme at a price of 1,170
2.
Sell the share in cash market today. +₹ 1,170
3.
Invest the funds received above(2)at cost of carry rate. -
₹1,170
4.
Enter into a one month futures contract to buy the share of ABC Ltd.
at ₹ 1,175/-per share [i.e. take long position in futures market]
5.
Redeem the funds invested in above (3)after one month to receive
funds with interest
+₹
1180.53
6.
Purchase the share at prefixed future price. -₹ 1,175
7.
Risk free profit (5 –6) +5.53
8.
Return Share to the Holder as per SLBS Scheme.

57. SecuritiesLendingandBorrowing(SLB)isamechanismthroughwhich
clientscanlendorborrowsecuritiesataspecifiedpriceandtime.Lendersand
borrowerscanquotealendingfeeandquantityatwhichtheywanttolendor
borrow,andtheorderwillbeexecutedifthequotesmatchattheexchange.
Why borrow securities?
Borrow and sell the stock immediately or short sell if the view is that the
price of stock will go down over a period of time.
Take advantage of arbitrage opportunities when futures or options are
mispriced.
To fulfil physical delivery obligations for F&O trades.