Trady, a trading company in shares, sells Rio Tinto shares to Hedgy, a hedge fund, and later that same day Trady borrows them from Unisuper. Three days after the purchase, Hedgy lends the security to Comminsure, which one day after borrowing them sells them to Trady. The same day, Trady returns the shares to Unisuper. The day after, Comminsure buys the shares from Unisuper and the same day returns them to Hedgy.

Note that when we say buy or sell we refer to both the order and the trade.

(i) Represent the transactions on a well labelled timeline (which may stretch over two lines). Show the order and the delivery (settlement). To avoid overcrowding the timeline merge order and trade/match under one denomination 'order', as if the order had found a match at once. Make sure that delivery indicates both the provider and the recipient.

(ii) For each of the three sale transactions above, characterize the nature of the transaction: ordinary sale, covered short sale or naked short sale and conclude whether they are authorized.

c) A speculator thinks that a particular share that is now selling at $500 is likely to decrease in price to $450 in six days. The speculator does not own the share.

(i) Represent on a timeline the whole strategy she could initiate at once using covered short-selling. [Each transaction should show the order and the delivery. To avoid overcrowding the time line, represent the order and the trade as one operation.]

(ii) Assume she manages to sell at $500 and the price of the share six days later is actually $530. Calculate the profit the strategy in (i) generates.