Question

In: Finance

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

He has 50% margin on 100 shares 20$ each, means 50% of 2000 i.e; 1000

He sold short 100 shares at 20$ means got credit of 2000

So total balance in his account is 3000...

His interest income at 10% pa for 3 months on 3000 would be 75$

Value of his asset=

a) Initial capital = $1000

b) His profit :

Sale of 100 shares @$20 = $2000

Purchase of shares @$15 = $150

Less: Total Commission = $100

= $400

c) Interest Income = $75

Total = $1000+$400+$75

= $1475

2) Return on equity

His totoa earning is $475 on the investment of 1000 in 3 months

So, the ROE will be

=$475*4

=$1900 on investment of 1000

So ROE = 190%


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