Question

You sell short 600 shares of Microsoft that are currently selling at $25 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 $24

Answer 1

Answer: 10%

Explanation:

Short sale of 600 shares at $25 will yield:

= 600 * 25

= $15,000

You posted 40% of this:

= 40% * 15,000

= $6,000

The profit in a year seeing as the price fell is:

= (25 - 24) * 600 shares

= $600

Rate of return is:

= Profit / Margin posted

= 600 / 6,000 * 100%

= 10%