RSM428H1 Lecture Notes - Lecture 2: Interest Rate Risk, Index Arbitrage, Securities Lending
Document Summary
Similar to repos, but use debt and equity securities of all types instead of just high quality federal and provincial bonds: used for financing, for shorting purposes, and to cover short sales. Since all shorts have to be covered today (no naked shorts), there is demand for securities lending. Shorting activity is usually driven by arbitrage opportunity. Borrower of security pays fee to lender for use of the loaned security: must return exact same security. Contrast to repos, where any similar quality security can be returned: when collateral is other securities, lender is paid a fee by borrower for use of original securities. Lender can use the collateral as they wish. When collateral is cash, lender pays interest to borrower. Cash flow: receivable variable pay fixed, change floating rate into fixed rate debt, cash flows are now hedged. Fair value: protects against changes in fair value of debt. Value of debt increasing: receive fixed/pay variable.
