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How would you include -in a simple way- high borrow rates, say 10%.

Intuitively, for PUTs I'd set r as r - borrow_rate, to include the negative carry of the borrow. So If I'm selling puts, value would increase to compensate the fact that keeping the short stock (the delta hedge) is costly.

Calls should be worth less as I'm receiving the short rate interest for holding the delta hedge.

Is it plausible this? Else, you could add the fee on the q. Which seems to me more easy as the borrow pnl is dependent on the underlying process and not the Bond Price (strike). Do you think this would apply to indices like a weighted average borrow rate added to the q dividend process?.

Best,

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  • $\begingroup$ Your speculation is completely correct. Note that the marginal seller of an option will price that option according to the borrow rates they are currently expecting to encounter for the life of that option. $\endgroup$
    – Brian B
    Sep 30, 2020 at 2:47
  • $\begingroup$ Thanks @BrianB! I'm leaning towards adding the borrow fees on the q rate. Or would you rather include it in r? $\endgroup$
    – TomDecimus
    Sep 30, 2020 at 20:15
  • $\begingroup$ Put it on q, as it does not have anything to do with the time value of money $\endgroup$
    – Brian B
    Oct 1, 2020 at 17:34

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