When borrowing shares for a short sale, the calculation of the short interest amount and collateral balance follows the standard U.S. industry convention. Here's how it is calculated:
1. Short Collateral Balance: The short collateral balance is determined by multiplying the prior day's settlement price of the stock by 102% and then multiplying it by the number of shares shorted. This ensures that the collateral deposited is slightly higher than the value of the borrowed shares.
Short Collateral Balance = (Prior Day's Settlement Price x 102%) x Number of Shares Shorted
2. Daily Short Interest Amount: The daily short interest amount is calculated by applying the effective short interest rate (provided by the lender) to the short collateral balance. The interest rate is typically expressed on an annual basis, so it is divided by 360 to calculate the daily interest charge.
Daily Short Interest Amount = (Effective Short Interest Rate / 360) x Short Collateral Balance
3. Accrual and Deduction: The daily short interest amount accrues each day you hold the short position and is deducted from your account balance. It is essential to monitor the interest charges and ensure sufficient funds are available to cover these costs.