B1

A speculator thinks that a particular share that is now selling at $309 is likely to decrease in price to $307 in two days. The speculator does not currently own the share.

(a) Represent on a time line the whole strategy she could initiate at once using covered short-selling. [Each transaction should show the order and the delivery. To avoid overcrowding the time line, represent the order and the trade as one operation that you call order.]

(5 marks)

(b) Assume she manages to sell at $309 and the price of the share two days later is actually $305. Calculate the profit the strategy in (a) generates [Show your working]. Interpret your answer.

(3 marks)

(c) Describe under which circumstances the strategy above would be illegal.

(1 mark)

(d) Explain what would happen if the lender of the security recalls the security 2 days after the sale order.

(1 mark)