Question

You establish a short position in 10,000 shares of QAN at $5.90 per share. QAN pays a dividend of $0.20 per share every 6-months. The current rebate on QAN shares is 2% per annum. What would be your dollar return if QAN fell to $3.60 after 6-months? a. $20,410 b. $25,590 c. $26,180

Answer 1

Answer: a.$20,410

To calculate the net dollar return we have to calculate 3 part i.e

1.) Return due to difference in price (If the price goes down t would be cash inflow for the short seller)

2.) Dividend payoff - Short-seller has to pay this amount (Cash outflow)

3.) Rebate payoff (cash outflow)

Difference in price $5.90 - $3.60 = $2.30 per share

Considering 10,000 shares, the amount would be 10,000*2.30 = $23,000

Dividend $0.20 per share. So, the total dividend for 10,000 shares is

10,000*$0.20 = $2,000 (Outflow for Short seller)

Rebate @2% per annum. So, it would be 1% for 6 months.

1% of $5.90 for 10,000 shares would be

1% of (5.9*10,000) = $590 (Again this would be cash outflow for the short seller)

So, Final amount = $23,000 - $2,000 - $590

= $20,410