Question

# Let's assume that you desire to short-sell 1,000 shares of ABC stock, which has a bid...

Let's assume that you desire to short-sell 1,000 shares of ABC stock, which has a bid price of \$14.74 and an ask price of \$14.96. You cover the short position 6 months later when the bid price is \$13.02 and the ask price is \$13.20.

(a) Taking into account only the bid and ask prices (ignoring commissions and interest), what profit did you earn?

(b) Suppose that there is a 0.4% commission to engage in the short-sale (this is the commission to sell the stock) and a 0.4% commission to close the short-sale (this is the commission to buy the stock back). How do these commissions change the profit in the previous answer?

(c) Suppose the effective 6-month interest rate is 2% and that you are paid nothing on the short-sale proceeds. How much interest do you lose during the 6 months in which you have the short position? Consider both cases, without commissions or with commissions.

a. Taking into account only the bid and ask prices (ignoring commissions and interest), what proﬁt did you earn?

(1000 × 14.74) - (1000 × 13.2) = 1540

b. Suppose that there is a 0.4% commission to engage in the short-sale (this is the commission to sell the stock) and a 0.4% commission to close the short-sale (this is the commission to buy the stock back). How do these commissions change the profit in the previous answer?

[1000 × 14.74 × (1-.004)] – [1000× 13.2 × (1+.004)]) = 1428.24

c.Suppose the effective 6-month interest rate is 2% and that you are paid nothing on the short-sale proceeds. How much interest do you lose during the 6 months in which you have the short position? Consider both cases, without commissions or with commissions.

=(1000×14.74 × (1-.002)) × (.002) = 29.42104

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