You short-sell 500 shares of a stock for one year – i.e., you borrow and sell th

Question

You short-sell 500 shares of a stock for one year – i.e., you borrow and sell the shares at time t = 0, and you purchase and return the shares at time t = 1. At time t = 0, the ask and bid prices of the stock per share are 75.25 and 73.50, respectively. At time t = 1, the ask and bid prices of the stock per share are 70.75 and 69.25, respectively. The short-seller must put up an additional 5,000 of collateral. At time t = 0.25, the stock paid a dividend of 1.20 per share. Let the effective market annual interest rate be 6%, and the interest rate at which short-sale proceeds and collateral are credited is 2%. Determine the profit or loss of the short-seller during the year.

Explanation / Answer

Particulars Price per share shares total value short sell in time 0 73.5 500         36,750 Pruchase in time 1 70.75 500         35,375 Difference            1,375 interest to be paid on collaeteral 5000*6%             (300) interest income on short sale proceeds and collateral (36750+5000)*2%               835 Dividend to be paid on short sale (500*1.2)             (600) Total profit            $1,310

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