Answer:
i = 20%
ii= 0%
iii= 15%
Explanation:
First, short selling representsthe selling borrowed securities in order to repurchase them after some time. These securities are not owned, but borrowed instead. The idea is to sell when its price is high and then re-purchase in the future when the price is lower.
a) Determine the return after a year as follows
The number of shares = 250
The price per share =$70
Rate of return is calcuated by the following:
(Number of shares sold short x changes in price) / Margin account amount
We use the three different cases as given in the question
Case 1 - $78
Rate of Return = 250 shares x ($70- $78)/ $10,000
Rate of Return = 250 shares x (-$8)/$10,000
= -$2000/ $10,000 = 0.2 or 20.00%
Case 2 - $70
Rate of Return = 250 shares x ($70- $70)/ $10,000
Rate of Return = 250 shares x ($0)/$10,000
= $0/ $10,000 = 0.00%
Case 3 - $64
Rate of Return = 250 shares x ($70- $64)/ $10,000
Rate of Return = 250 shares x ($6)/$10,000
= $1500/ $10,000 = 0.15 or 15.00%
