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On January 1, you sold short six round lots (i.e., 600 shares) of Four Sister's stock...

On January 1, you sold short six round lots (i.e., 600 shares) of Four Sister's stock at $41 per share. On March 1, a dividend of $2.50 per share was paid. On April 1, you covered the short sale by buying the stock at a price of $40 per share. You paid 50 cents per share in commissions for each transaction.

What is the value of your account on April 1st?

Solutions

Expert Solution

A short sale means selling of share first and then buying it afterward. So in this trade, we sold 600 shares at $41 and purchased it at $40. In between a dividend is paid which has to be borne by the seller as the dividend is only received by the owner of the stock i.e. the buyer of the stock. Hence being a seller we are liable to pay it.

The transaction cost is an additional cost which is 50 cents or $0.5 per share per transaction.

So the Profit or loss earned from the trade is = 600*(41 - 40 - 2.5 - 0.5 - 0.5) = -1500

So the value in the account on 1st April will be -1500

jeff jeffy answered 2 years ago
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