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Just what the question says. I understand lots of equity derivatives have secondary exposure to stochastic rates, but I would like to understand if there is a payoff that has borrow rate as one of its primary risk factors.

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  • $\begingroup$ From a theoretical point of view, total return swaps (traded) or forward-starting repos (not traded AFAIK) should be the most appropriate pure play trades on borrow rates. In addition, TRS/repo options should give you exposure to borrow rate vol, but I don't think these are traded (or at least, never heard of them). $\endgroup$ Sep 2, 2021 at 14:42
  • $\begingroup$ For example, the fixed leg of a TRS should closely track the repo (i.e. borrow rate) of the underlying equity. If you expect the borrow rate to go up (let us say, a parallel upward shift of the whole borrow rate term structure), you should enter into a payer TRS now, which you will offset later on by entering into a receiver TRS once the borrow rate has gone up. $\endgroup$ Sep 2, 2021 at 14:46

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