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Cost of carry
Hi all, I am reading papers about passport options. Some of them apply a cost of carry to the stock in trading account and apply a interest rate on the whole trading account. I have two questions here: 1. Why should the option holder pay the cost of carry for buying stocks?2 Why is the interest applied to the WHOLE trading account instead of the cash part in trading account? Are those two rates used in real world for passport options? Can anyone help? Thanks a lot!
Last edited by wjscorpio on November 28th, 2006, 11:00 pm, edited 1 time in total.
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- johnself11
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Cost of carry
ahhh the ol' passport eh? lemme guess, author of the paper was Bankers Trust.... that trade was such a creatively profitable piece of genius...... as far as your queries they both address the concept of "alternate investment opportunity".... anytime you tie up cash (futures margin, bond repo, etc) you are basically using the balance sheet of the bank for whom he works....in the case of option premium, if you didn't buy the option you would be able to invest the cash, so this is opportunity lost.....