Prepaid Variable Forwards

A small correction as regards #3. It is pre paid as the loan is given at the day of contract writing. The concept of put option and its premium remains the same. Remember at all times the borrower (eventually the seller) remains short the contract and is obligated to deliver the non of shares. As with any other contract, it could be cash settled. Effectively , this renders the whole program and the contract a collateralized borrowing.

Thanks a lot for the explanation HerbsDelite !

For whatever it’s worth, the holding period is stipulated as 5 years, not one year.

in the real word, will the initial agreed 100k shares need to put into a 3rd party’s account as collateral?

Good question.

Again, I’ve never constructed a PVF in real life, but putting the shares in some species of escrow account seems reasonable; I should think that the lender would want surety of one variety or another.