Question
Consider the situation where you are allowed to short sell shares in an asset against depositing money in a broker account that earns zero interest.
Consider the situation where you are allowed to short sell shares in an asset against depositing money in a broker account that earns zero interest. We shall assume that as a retail investor you must deposit more funds into this account to meet margin requirement than the value of the shares you have sold short. Assume the initial and maintenance margin is 60% and 50%. You short 2,000 shares. The initial price of the shares is $1.00, and the shares pay a dividend at the end of the first year of $0.05 per share. The price of the shares (ex-dividend) at the end of the first year is $0.99, and you buy back 1000 shares at this point. The dividend at the end of the second year is $0.05 per share again. The price of the shares (ex-dividend) at the end of the second year is $0.90, and you clear your position by buying back the remaining 1000 shares at the end of the second year. What is the return on your short sale transaction? You should assume you maintain the minimum margin requirements at all time
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