In a short sale against the box technique, you borrow shares from a lender, and sell them (you are long and short on the same underlying asset - so you are hedged re price risk).
I would have 2 questions please:
Borrowing and selling do not happen at a very short time one after the other, right? i.e. you can defer selling and hence the capital gains tax
You do not have any counterparty risk, right? But does the lender of the shares have this counterparty risk? (e.g. you cannot sell the shares as desired, so you cannot deliver them back as agreed?)
As a risk manager , let me add some words to Magician:
Counter Party Credit risk always accrues to the one to who the credit is due. The lender is at risk because of the asset as well as the rent that the lender is to receive. Mitigant is in the form of collateral which the borrower deposits with the lender. It is no brainier , higher the ‘quality’ of the collateral lesser is the risk. Lesser the time duration of the contract, lesser is the risk.
But just hypothetically think what if th collateral has a rarity value in the market or increases in value by the end of tenor. If it is perceived to be more valuable ( at maturity) than the original asset being lent then the counterparty risk shifts to the borrower instead of the lender.
That is what I thought as well. But then the CFA institute online questions mention: “The short sale against the box approach defers capital gains.” Does it really defer them? And if so, for tax reasons? Many thanks!
always answering my posts!