Question

You sell short 700 shares of Microsoft that are currently selling at $60 per share. You post the 50% 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 $54? (Ignore any dividends.)

Answer 1

Short sale price = 60

No. of shares= 700

Total Sale price = no. of shares*sale price

700*60

$42000

margin amount = 50% of 42000= 21000

Buying price = 54

Total buying price = 700*54

$37800

Rate of return = (Total sales price-Total buying price)/Margin amount

(42000 - 37800)/21000*100

20.00%

So, rate of return is 20% on short selling of shares