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When market makers price options on hard-to-borrow equities, they include the cost to borrow the underlying equity that their broker is going to charge them to sell the security short to hedge. I'm trying to back-out this cost. I'm guessing it is similar to implied volatility but I'm solving for the interest rate. Any suggestions on the same?
Lending rate is a question of bid and ask, sometimes the market is oversold or overbought. Therefore the market/ custodians charge rates based on the availability of stocks in their warehouse and how they feel the custody willl continue to be kept on these stocks. There is no mathematical value. It depends mostly on delivery problems and warehouse problems
