Question

Assume that you open a 100 share short position in Jiffy, Inc. common stock at the bidask price of $32.00 – $32.50. When you close your position, 6 months later, the bid-ask prices are $32.50 – $33.00. The commission rate is 0.5% and the annual semiannually compounded risk-free rate is 8%.

Question:

What are the cash flows and what is the profit or loss if the commissions are paid at the moment of transaction?

What are the cash flows and what is the profit or loss including the leasing of the asset?

Answer 1

Taking a short position today means you are selling the shares today.  

We are told that commission is paid at the moment of the transaction. Hence, commission will be deducted when you sell shares and cash comes in and it will be added (as an additional cost) when you buy shares and cash goes out.  

Revenue from Short Sale (Cash Inflow) = (100 shares x $32 per share) - (100 shares x $32 x 0.005) = $3,184

When covering the short sale six months later,

Cash Outflow = (100 shares x $33 per share) + (100 shares x $33 x 0.005) = $3,316.50

Hence, loss from the entire transaction = $3,316.50 - $3,184 = $132.50