When we monetize a position, first we hedge the position, making it risk-less, then we borrow against it. Once we have that loan, we pay interest on it. But the cost is lowered by the income received on the hedged position. What exactly does this mean- what income?
Similarly- I think the idea is that the hedged position ‘earns the risk free rate’…wouldn’t it earn nothing?
That’s one approach, but not the only approach.
In a prepaid variable forward, for example, you’re getting cash today but you’re not hedging then borrowing.
No.
For example, in a forward conversion with options, the strike price on the options will be today’s spot price increased at the risk-free rate.