Question

You sell short 700 shares of Microsoft that are currently selling at $30 per share. You post the 40% margin required on the short sale. If you earn no interest on the funds in your margin account, what will be your rate of return after 1 year if Microsoft is selling at $27

Answer 1

The rate of return after 1 year is 25%.

An internal indicator of the return on investment in a project is the rate of return. The interest rate is the imposed cost for borrowing money from lenders. The average rate of return approach reduces outlier statistics in data sets since it is based on averages. In long-term averages, when numerous years of gains can lessen the impact of a single year of losses, this is especially helpful.

Calculation:

When 700 shares are sold short at $30 a share, the sale price is:

=700 * $30

= $ 21,000

The necessary margin for a short sale is 40%.

It denotes the overall margin employed as follows:

=$ 21,000 * 40%

= $ 8,400

Gain from a short sale:

=($ 30 - $ 27) * 700 shares

= $2,100

As a result, the rate of return

Profit earned / Margin used:

= $2,100/ $8,400

= 0.25 or 25%

=25%

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