Question
Suppose XYZ stock has a bid price of $50.90 and an ask of $51.15 and a commission of $12 (on 100 shares). Suppose a month
Suppose XYZ stock has a bid price of $50.90 and an ask of $51.15 and a commission of $12 (on 100 shares). Suppose a month later the bid and ask prices are $48.40 and 48.70. a. (6 points) Ignoring the time value of money, what are your profits/losses if you long the stock first and sell later?
b. (6 points) Ignoring the time value of money, what are your profits/losses if you short-sell the stock first and buy back later?
c. (6 points) Suppose that borrowing the stock to short sell costs an additional $0.50 per share. What are your profits/losses if you short-sell the stock first and buy back later? d. (5 points) Suppose that during the month, the firm declares and pays a $1 dividend. What are your profits/losses if you short-sell the stock first and buy back later? Include the borrowing cost of $0.50 mentioned in c.
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