Interest Income (Money Market ROR) on a short sale against the box
“Because the long and short positions together constitute a riskless position, the investor will earn a money market rate of return on the $100 million position”
“The net cost of borrowing through a short sale against the box is quite low because the interest income earned on the completely hedged stock position greatly offsets the interest expense associated with the margin loan.”
The above two statements in Section 220.127.116.11 reference the income one can earn on a short sale against the box. I understand how the equity position is transformed into a riskless asset and that there will be interest expense on the margin loan and borrowing costs. What I do not understand is how the riskless position generates a money market ROR absent borrowing against it. Furthermore, there is no mention of the cost to borrow the shares.
Study together. Pass together.
Join the world's largest online community of CFA, CAIA and FRM candidates.