Question

payment 10 m 7. After an analysis of Lion/Bear, Inc., Karl O'Grady has concluded that the firm will face financial difficulty within a year. The stock is currently sell- ing for $5 and O'Grady wants to sell it short. His broker is willing to ex- ecute the transaction but only if O'Grady puts up cash as collateral equal to the amount of the short sale. If O'Grady does sell the stock short, what is the percentage return he loses if the price of the stock rises to $7? What would be the percentage return if the firm went bankrupt and folded? 8. Lisa Lacher

Answer 1

Grady believes that the firm co within a year thus price of stock 301:- A stock of bion Basel, Inc is Salling for $5. Kajilo' and that the firm will face financial difficulty will doo short sells the stock at the price of $5. He borows the stock through a broker and up cash as collataral and salls it for $5. But his prediction was corong. Instead of decrease, the glock prices incnases to $7. He buys the stock for $7 and got his collateral back from the broker. The on the investment will be Retum - curent price-future price) . x 100 - Currant price - 5-7 x 100 3-401. incurred a loss bacause he purchased the stock for $7 and sold it for $5. of his prediction turned to be correct and firm worst bankrupt, his porcentage return will be lool Because ha will get back his full amount and he don't have to pay anything