Suppose I want to build a pairs trading strategy. Theory says that we can create a zero-investment portfolio by going long stock A and short-selling stock B, given a certain hedge ratio. My question is the implementation of this in the real world.
We borrow stock B by entering a stock reverse repo. We sell stock B in the market at time $t=0$ and with the money from the sale we buy the stock A. When the spread between the A and B is close to zero, we sell the stock A and buy the stock B. We return stock B to the custody plus the repo rate. (For brevity hedge ratio is not taken into account).
Is this correct?