On the No-Arbitrage Relation between Securities Lending Fees and Option Prices

We study the economic determinants of the no-arbitrage relation between securities lending fees and synthetic short positions constructed from options. We show that option-implied lending fees are systematically downward-biased for long-maturity contracts, consistent with the impact of early exercise premia. Accounting for bid-ask spreads further widens these deviations, suggesting that synthetic shorts embed compensation for avoiding securities lending risks. We also show that market maker behavior, shaped by regulation and hedging constraints, plays a key role in the transmission of borrowing costs into option prices. Our findings highlight the limits of arbitrage in practice and demonstrate that options are not redundant securities; rather, they can be used to circumvent some short-sale constraints.