Question

Hello,

I just need help on part b. However, you need part a in order to answer part b, I believe. If you could please explain how we deal with interest as it relates to short selling so I can solve similar problems myself in the future, that would be much appreciated. Thank you in advance!

Q2. (a) You are bullish on Telecom stock. The current market price is $50 per share, and you have $5,000 of your own to invest. You borrow an additional $5,000 from your broker at interest rate of 8% per year and invest $10,000 in the stock. What will be your rate of return if the price of Telecom stock goes up by 10% during the next year?

b) You are bearish on Telecom stock and decide to sell short 100 shares at the current market price of $50 per share and the initial margin requirement is 50% of the value of the short position. What will be your rate of return if the price of Telecom stock goes down by 5% during the next year?

Answer 1

b) here interest rate ia not given so we have to not think about it. Solution and explanation is attached in the image below:

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