A stock is trading at a price of $15 in year 0. In year 1 it pays a dividend of

Question

A stock is trading at a price of $15 in year 0. In year 1 it pays a dividend of $1 and the price (ex-dividend) has increased to $16. In year 2 it also pays a dividend of S1, and the price has gone down to $13. In year 0 you short 100 shares which you buy back in year 2, and you trade on a margin where you are required to hold 150% of the value of your short position (you should assume the initial margin and the maintenance margin are both 150% of the value of the short position) in a margin account paying zero interest. What is the return on your short position?

Explanation / Answer

Year 0 1 2 Price 15 16 13 Dividend 1 1 Position -100 100 Margin 2250 2250 -2250 Rate No Value Sale Price               15            100         1,500 Purchase price               13            100         1,300 Profit            200 Dividend            100 Total Profit            300 Simple rate of Retrun 300/(2250*2) 6.67% Assumed in year 2 price $13 is including dividend not ex-dividend

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