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

Short selling Price /share 73.5 No of shares 500 Amount of short sale          36,750 Collateral Money            5,000 Purchase price 70.75 No of shares 500 Amount of purchase          35,375 Gain on Short sale            1,375 Less : Dividend @$1.2/share       (600.00) Less : Diffetrential interest (6% -2%) on borrowing of $36750    (1,470.00) Add Interest on Collateral @2% 100 Net Profit /Sale on short sale $         (595)

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.