You sell short 700 shares of Microsoft that are currently selling at $30 per share. You post the 40% margin required on the short sale. If you earn no interest on the funds in your margin account, what will be your rate of return after 1 year if Microsoft is selling at $27? (Ignore any dividends.)
If we short sell 700 shares @ at $30 per share, then sale value is: 700 * $30 = $ 21,000
The margin required:40% on the short sale.
It means the total margin used: $ 21,000 * 40% = $ 8,400
Profit earned on short sale: ($ 30 - $ 27) * 700 shares = $2,100
Hence, the rate of return: Profit earned / Margin used = $2,100/ $8,400 = 0.25 or 25%
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