Synthetic Secured Lending Using Single Stock Futures EFPs

The structure of the single stock futures (SSF) market makes it as ideally suited for borrowing and lending money at the AA+ credit rating of the Options Clearing Corporation as European-exercise index options on the S&P 500 (SPX). The reason is simple: Just as trades in European-exercise options cannot be exercised until the expiration date, neither can trades in SSFs.

In addition, as long and short positions in SSFs deliver into long and short positions, respectively, in the underlying stock or exchange-traded fund, there is no basis risk. The future will be priced at the stock plus the interest rate cost of carry minus the future value of the expected dividend. As expiration approaches, the future’s price converges to the stock’s price and then delivers into the stock itself.

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