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I have heard a delta-one trader mentioning the dependency of its activity on interest rates, dividend yields and repo rates.

While I can understand the exposure he has to interest rates and dividend yields through the trading of futures contract, as per the formula of the futures price:

$$F(t,T) = S_t \times e^{(r-q)(T-t)} $$

where $S_t$ is the spot price at time $t$, $r$ is the interest rate, $q$ is the continuous dividend yield and $T$ the maturity of the contract, I can't see where the repo rate dependence is coming from.

Is it coming from the margin requirements? Like for example if you were to post margins on this position, you would earn the interest rate (the repo rate?) on the margins you have posted at the broker's?

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For an individual stock, the repo rate IS the interest rate r contained in the formula for the forward price. For example, suppose you are trying to replicate a forward contract by holding the stock. You need to finance the purchase of the stock, but the easiest way of doing that for most market participants is to pledge the stock as collateral against a loan- which is a repo contract.

It’s true that repo rates across a large stock portfolio may be approximated by a generic interest rate r (say Fed Funds) but it need not be the case in theory.

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  • $\begingroup$ Thanks, that helps clarifying! But then in which case/for which underlying the repo rate IS NOT the interest rate $r$? $\endgroup$ – JejeBelfort Oct 2 '19 at 6:29
  • $\begingroup$ From the theoretical point of view it is always the repo rate for the specific stock in question that should be used as $r$. Use other short term rates (FF, REPO-GC, SOFR) only as an approximation. $\endgroup$ – Alex C Oct 2 '19 at 17:37
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It is a form of convenience yield. If someone is willing to pay you a fee to borrow your bond, that increases your desire to own the bond rather than the futures contract. If the future's price was not adjusted lower for this yield, you could make an arbitrage profit by buying the bond/stock, lending it to collect the fee, and shorting the future.

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