Abstract
We look at different models to manage spreads on daily securities loans and aid the price discovery process using a theoretical borrow rate; improve the efficiency of the locate mechanism and optimize the allocation of inventory using the Knapsack algorithm; price long term loans as a contract with optionality ejavascript: void(0); mbedded in it; and also look at ways to benchmark which securities can be considered to be more in demand or highly shorted and use this approach to estimate which securities are potentially going to become “hot” or “special”, that is securities on which the loan rates can go up drastically and supply can get constrained. We then consider an investment idea that can be designed based on knowing which securities are the most shorted. We run numerical simulations to demonstrate the practicality of these models.
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