The author in this article -- http://streetwiseprofessor.com/?p=7294 -- states that an increase in stock borrowing costs decreases a stock's forward price:

In the absence of manipulation, the forward price of a stock should be the current spot price plus the cost of financing the position at the prevailing interest rate until the delivery date on the forward. In the absence of a squeeze, the cost/fee to borrow the stock should be small. However, in a squeeze, it is costly to borrow the stock: the bigger the squeeze, the bigger the cost of borrowing. This borrowing cost depresses the forward price. Thus, during a squeeze, the forward price is below the spot price plus financing costs.

But why? Shouldn't the effect be similar to increased dollar financing rates, namely an increase in the forward price?


1 Answer 1


The rate of interest on cash and the cost of borrowing the stock work in opposite directions. Think of the cost of borrowing the stock as a kind of "dividend" that the stock pays off to its holders. As a stock owner you receive this amount [if you lend the shares] while you pay the interest rate if you hold the stock on margin.


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