Question

You sell short 300 shares of Microsoft which are currently selling at $30 per share. You post the 50% margin required on the short sale. Your broker requires a 30% maintenance margin. Assume you earn no interest on the funds and ignore any dividends. If you earn no interest on the funds in your margin account what will be your rate of return after one year if Microsoft is selling at $27? (Ignore any dividends)

Answer 1

Answer:

The rate of return will be of 20%

Explanation:

These are the follwong steps to calculate  the rate of return:

First you need to calculate the inflow of funds from short selling of Microsoft shares

The number of shares by the information reunited is 300

The selling price of each share is $ 30 per share.

Total sale proceeds is 300 shares×$ 30 per share =$9000

Secondly you need to calculate the margin requirement

Margin requirement on short sale 50 %

Total sale proceeds on short sale×50%=$ 4500

Next year we will again buy each share at $ 27

Total outflow of funds will be $ 27*300 shares = $ 8100

With the information calculated above, we are ready then to calculate the net equity after one year

Net equity will be= (9000+4500-8100)= $5400

Finally, we are ready to calculate the Rate of return

If the net equity will be of $5400, the margin amount deposited is $ 4500, and net gain is $900, rate of return is as follows:

Rate of return= (900/4500)×100= 20%