Index implied repo greater than the stock repo?

Discussion in 'Options' started by fuqs, May 31, 2018.

  1. fuqs

    fuqs

    I've observed that the repo rate implied from synthetic forwards on Euro Stoxx 50 is significantly higher than the repo rate implied from synthetic forwards on individual stocks that are constituents of the index. This is especially pronounced for the short-end tenors (<0.5y) Why this occurs? Shouldn't the repo of the index be approximately equal to the average of the repo of its constituent stocks?
     
    Last edited: May 31, 2018
  2. What is repo?
     
  3. fuqs

    fuqs

    It's a convenience yield due to the fact that you can buy a hedge and then lend it until the expiry in the repo market
     
  4. sle

    sle

    I have not looked at it for a while, but it's probably a result of a some sort of funding discrepancy. You can hedge the stoxx options with futures while hedging delta-one in single stock has a meaningful funding impact (I need to think about the direction based on your description). How big is the differential?
     
  5. fuqs

    fuqs

    It's around 20 bps on average (SX5E vs constituents' average)
     
  6. sle

    sle

    20bps annualized, puts over? If that's the case, my hypothesis would be that put buyers are being penalized for the cash generated by shorting the delta (since the rates are negative). I assume if you check the futures that effect is still there?

    If you were gonna put that on, you can execute futures+EFP and then quote combos tied in the broker market. This way you get zero legging risk. Personally, I'd consider it not really actionable, since you get 5-10bps for a 3-6 month trade with a bunch of legs - once you pay the vig on the legs, you have very little edge left.

    PS. when you say "constituents average" you do mean weighted average, right?
     
    Last edited by a moderator: Jun 1, 2018