macrocephalopod on Twitter: "Regarding Cem's comment "collateral is different from financing" -- the $50m you put down as margin is collateral (it could be cash but it might also be treasuries or money market funds or something else which is effectively cash). The $58,333/day is financing.… https://t.co/tQb79iAYca"

@macrocephalopod

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Cem Karsan ‏ @jam_croissant 9 Mar 2021

Replying to @M1tchRosenthal @macrocephalopod and

Collateral is different than financing.

2 replies 0 retweets 7 likes

Mitchell Rosenthal‏ @M1tchRosenthal 9 Mar 2021

Replying to @jam_croissant @macrocephalopod and

Ah true, Im a little tripped up here. So I think scenario is: You have 100mil in cash, &100mil in borrowed $ (margin) You are long 1bil of SPY, which costs 1bil You are short 1bil notional of SPYfut, which costs the futures margin From here Im a bit lost.

1 reply 0 retweets 4 likes

Mitchell Rosenthal‏ @M1tchRosenthal 9 Mar 2021

Replying to @M1tchRosenthal @jam_croissant and

It sounds like total funds to use are 200mil. The cost of the futures position is Z. So we only have (200mil - Z) left to cover the stock position, but thats not enough cuz it costs 1bil. Is that why we need broker financing?

1 reply 0 retweets 4 likes

macrocephalopod‏ @macrocephalopod 9 Mar 2021

Replying to @M1tchRosenthal @jam_croissant and

Essentially yeah. Stocks (including ETFs) are cash instruments, when you buy them *someone* needs to hand over cash in exchange. If you do it on margin, that just means your broker is handing over the cash and charging you for it (effectively they are lending you the cash).

3 replies 4 retweets 48 likes

macrocephalopod‏ @macrocephalopod 9 Mar 2021

Replying to @macrocephalopod @M1tchRosenthal and

Futures are a derivative, not a cash instrument, when you enter the futures position no cash immediately changes hands (other than margin) because the value of the futures contract at the point you enter it is zero.

1 reply 0 retweets 24 likes

macrocephalopod‏ @macrocephalopod 9 Mar 2021

Replying to @macrocephalopod @M1tchRosenthal and

Say margin is 5% on both stocks and futures. You have $100m. You go long $1bn of SPY and short $1bn of ES futures. You put down $50m of margin with your broker to cover risk on the SPY position and $50m with the exchange to cover risk on the ES futures.

1 reply 0 retweets 17 likes

macrocephalopod‏ @macrocephalopod 9 Mar 2021

Replying to @macrocephalopod @M1tchRosenthal and

The futures hedge the SPY so you have no market risk - whenever you lose on the SPY position you win on your ES short, and you get cash in your exchange margin account that you can use to satisfy your broker's margin demands.

2 replies 0 retweets 9 likes

macrocephalopod‏ @macrocephalopod 9 Mar 2021

Replying to @macrocephalopod @M1tchRosenthal and

Say interest rates are 2%. Your broker may charge you 2.1% for financing, so they will require you to send them $58,333 every day as interest on the loan they are giving you. You get that money because you sold the futures at a higher price than the cash index, and as the futures

1 reply 0 retweets 11 likes

macrocephalopod‏ @macrocephalopod 9 Mar 2021

Replying to @macrocephalopod @M1tchRosenthal and

roll down towards spot, you get approx $55,555 (1e9 x 0.02 x 1/360) more in your exchange margin account each day than the amount that you need to cover margin with your broker.

1 reply 0 retweets 13 likes

macrocephalopod‏ @macrocephalopod 9 Mar 2021

Replying to @macrocephalopod @M1tchRosenthal and

The difference of $2,778 (1e9 x 0.001 x 1/360) is the true cost you are paying for financing -- it arises because your broker charges you more than the implied financing rate of ES futures, this is the "cost of carry" that Cem was talking about.

1 reply 0 retweets 15 likes

macrocephalopod‏ @macrocephalopod 9 Mar 2021

Replying to @macrocephalopod @M1tchRosenthal and

Regarding Cem's comment "collateral is different from financing" -- the $50m you put down as margin is collateral (it could be cash but it might also be treasuries or money market funds or something else which is effectively cash). The $58,333/day is financing.

10:59 AM - 9 Mar 2021