Question

Suppose you know nothing about widgets. You are going to approach a widget merchant to borrow one in order to short-sell it. (That is, you will take physical possession of the widget, sell it, and return a widget at time T .) Before you ring the doorbell, you want to make a judgment about what you think is a reasonable lease rate for the widget. Think about the following possible scenarios.
a. Suppose that widgets do not deteriorate over time, are costless to store, and are always produced, although production quantity can be varied. Demand is constant over time. Knowing nothing else, what lease rate might you face?
b. Suppose everything is the same as in (a) except that demand for widgets varies seasonally.
c. Suppose everything is the same as in (a) except that demand for widgets varies seasonally and the rate of production cannot be adjusted. Consider how seasonality and the horizon of your short-sale interact with the lease rate.
d. Suppose everything is the same as in (a) except that demand is constant over time and production is seasonal. Consider how production seasonality and the horizon of your short-sale interact with the lease rate.
e. Suppose that widgets cannot be stored. How does this affect your answers to the previous questions?


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  • CreatedAugust 12, 2015
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