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You are given the following information about a non-dividend paying stock and the bid and ask prices on the stock: i) 200 shares of the
You are given the following information about a non-dividend paying stock and the bid and ask prices on the stock:
i) 200 shares of the stock is shorted. The bid price at that time is 40.75 and the bid-ask spread is 0.75. ii) The collateral of 110% of the stock's value based on the the ask price, the price it may be purchased from the market-maker. iii) The investor pays 6% annual effective interest rate on cash borrowed to provide the collateral. iv) The short rebate is 5%. v) After three years the position is closed: the stock is bought back. vi) At that time the bid price is 30.20 and the bid-ask spread is 0.50. vii) There are no commissions paid when buying or selling the stock. Calculate the investor's net profit on the short sale. i) 200 shares of the stock is shorted. The bid price at that time is 40.75 and the bid-ask spread is 0.75. ii) The collateral of 110% of the stock's value based on the the ask price, the price it may be purchased from the market-maker. iii) The investor pays 6% annual effective interest rate on cash borrowed to provide the collateral. iv) The short rebate is 5%. v) After three years the position is closed: the stock is bought back. vi) At that time the bid price is 30.20 and the bid-ask spread is 0.50. vii) There are no commissions paid when buying or selling the stock. Calculate the investor's net profit on the short saleStep by Step Solution
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