Question
Let's assume that you desire to short-sell 1,000 shares of ABC stock, which has a bid price of $14.74 and an ask price of $14.96.
Let's assume that you desire to short-sell 1,000 shares of ABC stock, which has a bid price of $14.74 and an ask price of $14.96. You cover the short position 6 months later when the bid price is $13.02 and the ask price is $13.20.
(a) Taking into account only the bid and ask prices (ignoring commissions and interest), what profit did you earn?
(b) Suppose that there is a 0.4% commission to engage in the short-sale (this is the commission to sell the stock) and a 0.4% commission to close the short-sale (this is the commission to buy the stock back). How do these commissions change the profit in the previous answer?
(c) Suppose the effective 6-month interest rate is 2% and that you are paid nothing on the short-sale proceeds. How much interest do you lose during the 6 months in which you have the short position? Consider both cases, without commissions or with commissions.
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