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Synthetic forwards and cost of funding in the equity derivative market

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  • Azzone, Michele
  • Baviera, Roberto

Abstract

This study introduces a new technique to recover the implicit discount factor in the derivative market using only European put and call prices: this discount is grounded in actual transactions in active markets. Moreover, this study identifies the implied cost of funding, over OIS, of major market players. Does a liquid equity market allow arbitrage? The key idea is that the (unique) forward contract -built using the put-call parity relation- contains information about the market discount factor: by no-arbitrage conditions we identify the implicit interest rate such that the forward contract value does not depend on the strike.

Suggested Citation

  • Azzone, Michele & Baviera, Roberto, 2021. "Synthetic forwards and cost of funding in the equity derivative market," Finance Research Letters, Elsevier, vol. 41(C).
    • Handle: RePEc:eee:finlet:v:41:y:2021:i:c:s154461232031655x
    DOI: 10.1016/j.frl.2020.101841
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    References listed on IDEAS

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    Cited by:

    1. Michele Azzone & Roberto Baviera, 2023. "Is (independent) subordination relevant in option pricing?," Papers 2307.08628, arXiv.org, revised Oct 2023.
    2. Tong, Eric, 2024. "Repercussions of the Russia–Ukraine war," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 366-390.

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    More about this item

    Keywords

    Forward price; Put-call parity; Implied interest rate; Cost of funding; Synthetic forward;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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