Fill in the blanks and show your works John Q. Investor takes a short position o

Question

Fill in the blanks and show your works

John Q. Investor takes a short position on 1,000 shares of Apple (AAPL), selling at $218.94 per share on May 21. Dividends are estimated at $28 per year paid quarterly, and the last Ex-date was April 25. JQ's broker charges him $100 for the loan of the shares every six months.

JQ covers his position on November 17 at $260.08 At the time of the initial sell JQ's broker must deposit to JQ's margin account a total of $__________ and JQ's initial investment is $ _________.

JQ's profit on this position is $ ________

The holding period rate of return is ________% and the rate of return on the underlying asset is ________%

Explanation / Answer

The number of shares purchased are 1,000. Since the stock is purchased after the ex-dividend date, the investor owns the dividend payment.

The initial selling price is $218.94, and the semi-annual dividend payment is $14.

Margin account = $218.94 x 1000= $218,940

Initial investment = Margin account - Broker fees = $218,940 - $100

                                                                             = $218,840

Profit = (260.08 - $218.94 + $14) X 1000 = $55,140

Holding period return = $55.14 / $218.94 = 0.25 or 25.00%

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