BB example 7- Text says- The €2 per share borrowing costs and the €1 dividend payable to the lender together represent a €3 per share outflow that Khan must pay. But, the convertible bond pays a 5% coupon or €50, which equates to an inflow of €1 per share equivalent (€50 coupon/50 shares per bond). Therefore, the total profit outcomes, as indicated in the table, would each be reduced by €2. In sum, Khan would realize a total profit of €4 per each QXR share.
My Q here is that if we have borrowed the stock, the title will be with us right? Then we should receive the dividend. If we receive the dividend and have to pay it back to the lender, it will not be a cost to us right? then why it has been added to our cost here?
The security borrower (short) is obligated to pay back all the gains that would have been entitled to the security owner should it have been kept with the original owner, including dividend. So dividend is part of the trading cost.
By the way, “QXR’s convertible bond price is 1,200 = (1,000 * 120/100)”, do you know where the 1000 come from?
The $1,000 is the par value of the convertible bond (which is a general figure used for issuance of Convertible bonds). To be fair, the example should state it clearly.