Date: August 14, 2017
*Investor’s cost of funding is assumed to be 7%pa ** Expenses include brokerage , clearing , access fees and GST A brokerage fee of 0.5%, clearing fee of 0.04%, access fee of 0.0075%, GST of 7% and cost of fund of 7% for initial ES margin is used in this illustration.
Instead of selling the underlying at $17, the investor could sell at $17.40 through an ES contract for future delivery. However, this has to be weighed against the cost-of-carry (e.g. borrowing cost, interest or re-investment return foregone) from an outright sale of the underlying. For example, if bank lending rate is at 7% p.a., the interest savings foregone from the sale of 1,000 ABC shares is $17,000 x 7% x 10/365 = $32.60. Hence, the premium has to be greater than this for a profitable trade. In this instance, the implied cost-of-carry is about 0.19% of the underlying share price.
Caution: If ES contract prices moves up after the short selling, the investor could face margin calls unless he has sufficient funds to maintain the initial margin.
