Question
You short-sell 500 shares of a stock for one year i.e., you borrow and sell the shares at time t = 0, and you purchase
You short-sell 500 shares of a stock for one year i.e., you borrow and sell the shares at time t = 0, and you purchase and return the shares at time t = 1. At time t = 0, the ask and bid prices of the stock per share are 75.25 and 73.50, respectively. At time t = 1, the ask and bid prices of the stock per share are 70.75 and 69.25, respectively. The short-seller must put up an additional 5,000 of collateral. At time t = 0.25, the stock paid a dividend of 1.20 per share. Let the effective market annual interest rate be 6%, and the interest rate at which short-sale proceeds and collateral are credited is 2%. Determine the profit or loss of the short-seller during the year.
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