A short seller wants to short 10 shares of a stock that has a current bid-ask...

 

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• A short seller wants to short 10 shares of a stock that has a current bid-ask spread of $100-$101. The commission rate is 0.5%. • The stock pays a dividend of $5 at the end of the year. The lender requires collateral equal to the proceeds of sale plus a haircut of $50 to be posted. •The risk free interest rate is 4%. The asset is in reasonable demand, so the lender is able to negotiate a short rebate rate of 3% paid on total collateral. Interest is compounded annually and paid at the end of the year. One year from now the stock has a bid-ask spread of $98 - $99. Assuming the position is covered at the end of the year, calculate the short seller's return on capital. • A short seller wants to short 10 shares of a stock that has a current bid-ask spread of $100-$101. The commission rate is 0.5%. • The stock pays a dividend of $5 at the end of the year. The lender requires collateral equal to the proceeds of sale plus a haircut of $50 to be posted. •The risk free interest rate is 4%. The asset is in reasonable demand, so the lender is able to negotiate a short rebate rate of 3% paid on total collateral. Interest is compounded annually and paid at the end of the year. One year from now the stock has a bid-ask spread of $98 - $99. Assuming the position is covered at the end of the year, calculate the short seller's return on capital.

Answer rating: 100% (QA)

To calculate the short sellers return on capital we need to determine the total cost of the sho... View the full answer