Ms. Tejal Gandhi has decided that the stock of SmallCap Inc is overvalued at $4 a share
Question:
Ms. Tejal Gandhi has decided that the stock of SmallCap Inc is overvalued at $4 a share and wants to sell it short. Since the price is relatively low, short sales cannot be executed on margin, so Ms. Gandhi must put up the entire value of the stock when it is sold short.
a) What is the percentage loss if the price of the stock rises to $8?
b) What is the percentage loss if the price of the stock rises to $10?
c) What is the percentage gain if the company goes bankrupt and is dissolved?
d) What are the maximum percentage gain the short seller can earn and the largest percentage loss the short seller can sustain?
e) From the short seller’s perspective, what are the best and worst case scenarios?
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The next three problems are concerned with selling short Short sellers must put up collateral so the ...View the full answer
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