Inventory isn't free, the carry on a long book

Question

You're carrying a long position of 100{,}000 shares in a \50 stock, a \5 million position, financed at an annual rate of 5\%. You hold it overnight. What does one night of carry cost, and how much spread does that eat into? Why does carry push you to turn inventory faster?

Accepted Answer

Daily carry cost. Financing a \5 million position at 5\% per year, charged daily (using a 360-day convention): 	ext{carry per day} = \5{,}000{,}000 	imes \frac{0.05}{360} = \frac{250{,}000}{360} \approx \694 	ext{ per night.} Holding this position costs about \700 every night just in financing, before any market move. How much spread that eats. Suppose you built the position earning a 2-cent half-spread, i.e. 0.02 	imes 100{,}000 = \2{,}000 of gross spread. One night of carry (\694) already consumes about a third of it. Hold it for three nights and carry alone (\approx \2{,}080) has erase…

Inventory isn't free, the carry on a long book

Your answer

More Market Making questions