Synthetic forwards and cost of funding in the equity derivative market

Michele Azzone and Roberto Baviera

Finance Research Letters, 2021, vol. 41, issue C

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.

Keywords: Forward price; Put-call parity; Implied interest rate; Cost of funding; Synthetic forward (search for similar items in EconPapers)
JEL-codes: E43 G12 G13 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:41:y:2021:i:c:s154461232031655x

DOI: 10.1016/j.frl.2020.101841

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