Short sale against the box - earns RF?

CFA Level III Portfolio Management
#1

Hi,

Can anyone explain why is it that the short sale against the box earns the investor a RF return?

Since he’s borrowing shares, he’d pay Rf to whoever lend these shares, right? Where does the net RF return come from?

#2

He borrows the stock from someone, then sells it and invests the money at the risk free rate.so he earns the risk free rate.

If the stock goes up then he has to pay back more. Because he’s short, he’s hoping the stock will drop and he will buy it back at a lower price.

#3

Yes. But how about the risk free rate he must pay to the person that has lent him the stocks?

#4

Technically you’re right, there are transaction costs but the curriculum ignores it. Much like ignoring air resistance in physics classes.

#5

I see, makes sense. Hehe

Thanks!

#6

I think that ignores the borrowing cost from the lender of shares. As you short the shares, your net position is zero hence you’re only left with the profit on shares that can be invested in a risk free asset.