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On January 1, you sold short 100 shares of XYZ stock at $20 using a 50%...

On January 1, you sold short 100 shares of XYZ stock at $20 using a 50% initial margin. The interest rate on the margin account is 10% annually. On April 1 (in three-months), you covered the short sales by buying stock at a price of $15 per share. You paid 50 cents per share in commissions for each transaction. Assume you received interest on all your assets, i.e. the sum of the short sale proceeds and the margin.
1. What is the value of your assets and equity on April 1?
2. What is the total rate of return on equity?

Solutions

Expert Solution

50% Margin on 100 share $20 each = $1,000 (2,000 * 50%)

Sold short 100 share at $20 = $2,000 credit got

Total balance = $3000 (1,000 + 2,000)

Interest income = Income * interest rate * time period

= $3,000 * 10% * 3/12

= $75

a. Initial capital = $1,000

PROFIT : Sale of 100 share at $20 = $2,000

Purchase of share at $15 = $1,500

Less: Total Commission = $100

= $400

Interest income = $75

Total = Initial capital + profit + interest income

= $1,000 + $400 + $75

= $1,475

2. Return on equity

Total earning = $475

Investment = 1000 (3 months)

ROE will be = $475 * 4 = $1900

$1,900 on investment of $1,000

ROE = $1900/$1000 * 100

= 190%

jeff jeffy answered 2 years ago
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