Selling short. Assume that you sold short 100 shares of the stock. Assume that y
ID: 2695192 • Letter: S
Question
Selling short. Assume that you sold short 100 shares of the stock. Assume that you sell short on the first day of Week 1 and buy back the stock on the last day of Week 4. Because a short sale involves borrowing, the margin rules apply: assume that the margin requirement is 50% and that the maintenance margin is 30%. Track the price of the stock each week,(bac price: $11.30) noting the market price of the stock and your potential loss at the end of each week. Calculate the return on your short sale transaction, assuming a commission on buying and selling of 0.5% of the market value of the stock. Be sure to factor in any dividends paid on the stock during the four-week period and the interest paid on the borrowed funds. Show your calculations. Iam having a very difficulty trying to solve, Please help me with the calculationExplanation / Answer
The following week, the price of ABC stock falls to $20 per share. You call yourbrokerand tell him to buy 10 shares of ABC stock, at the new price of $20 per share. You pay him the $200 (10 shares x $20 per share = $200). A few days later, you pick up the shares of ABC and bring them by my office. "Here are the ten shares I borrowed," you say as you put them on my desk.
Do you see what happened? You borrowed my shares of ABC, sold them for $500. The following week, when ABC fell to $20 per share, you repurchased those ten shares for $200 and gave them back to me. In the mean time, you pocketed the difference of $300.
Some investors practice shorting stock as a hedge to protect their portfolio. In most cases, this is not required nor recommended for individual or institutional investors. If you have selected a company you believe has excellent prospects for the next decade, you should view a declining market as an opportunity to purchase more of a good thing, not something to be dreaded.
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