Question

On January 1 you sold short 100 shares of SN Corp. stock at $23 per share. On March 1 the stock paid a dividend of $2.50 per share. On April 1 you covered the short sale by buying the stock at $18 per share. The broker commission for trading is $0.10 per share.

What was your initial investment?

What was your net return in dollars?

What was the annualized return in percent?

Answer 1

Solution

Initial investment is case of short selling is due to margin requirement. If there is no margin requirement then we can have the cash inflow by selling the stock

Here we can sell at 23 Per share so cash inflow = 23*100 = 2300,

There us $0.1 per per share commision

So we have to pay $0.1*100 = $10 commmission

Total Cashflow =2300 -10 = 2200

Net return :

Dividend = 2.5*100 = 250

Total commission = $10+$10 =$20

Net return = (Seling - Buy price) - commission paid - dividend

= (23-18)*100 - 20 - 250 = 230

What was the annualized return in percent?

Annualised return = Return /(Buy price+commision) =230/1810 =12.70%