Question

(ii). An investor sells 250 shares short at $28. The sale requires a margin deposit equal to 55 percent of the proceeds of the sale.

1. If the investor closes the position at $37, what was the percentage earned or lost on the investment?

2. If the position had been closed when the price of the stock was $22, what would have been the percent earned or lost on the position?

Answer 1

Value of contract = 250 * 28 = 7000

Loan = Value of Contract * (1- Inital Margin)

= 7000 * (1-0.55)

= 3150

Invested Amount     = Value of Contract - Loan Amount

= 7000 - 3150

= 3850

Part a)

Short sale 28

Closed (Buy Back) @ 37

Loss = (37 - 28) * 250 = 2,250

% Loss = Loss / Money Invested

= 2250 / 3850

= 58.44%
  

Part b)

Short sale 28

Closed (Buy Back) @ 22

Profit = (28 - 22) * 250 = 1500

% Profit = Profit / Money Invested

= 1500 / 3850

= 38.96%