To calculate your rate of return on the investment after short selling 100 shares of GE, you’ll need to consider various components such as the initial short sale, dividend payments, interest charges, and the final buyback cost. Let’s break down the calculation step by step:
Initial Short Sale: You shorted 100 shares of GE at $35 per share. So, your initial short sale proceeds are:
Initial Proceeds = 100 shares * $35/share = $3,500
Margin Requirement: Your broker requires a margin of 55%. To calculate the margin requirement, use the following formula:
Margin Requirement = Initial Short Sale Proceeds * Margin Requirement Percentage Margin Requirement = $3,500 * 55% = $1,925
Commission on Sale: You paid a commission of $15 for the initial short sale.
Dividend Payment: While you were short, GE paid a dividend of $0.75 per share. You shorted 100 shares, so you owe the dividend amount:
Dividend Payment Owed = 100 shares * $0.75/share = $75
Interest Charges: You borrowed 100 shares to short sell them, and you need to pay interest on the borrowed shares. The interest rate is 6% per annum. To calculate the interest charges, use the following formula:
Interest Charges = (Initial Short Sale Proceeds – Margin Requirement) * Interest Rate Interest Charges = ($3,500 – $1,925) * 6% = $93.75
Buyback Cost: At the end of one year, you buy back 100 shares of GE at $30 per share. So, your buyback cost is:
Buyback Cost = 100 shares * $30/share = $3,000
Commission on Buyback: You paid a commission of $15 for the buyback.
Now, let’s calculate your net return:
Initial Proceeds: $3,500
Margin Requirement: -$1,925
Commission on Sale: -$15
Dividend Payment Owed: -$75
Interest Charges: -$93.75
Buyback Cost: -$3,000
Commission on Buyback: -$15
Total Costs and Expenses: $6,124.75
To calculate your rate of return, you need to find the difference between the initial proceeds and the total costs and expenses, and then divide by the initial proceeds:
Rate of Return = (Initial Proceeds – Total Costs and Expenses) / Initial Proceeds Rate of Return = ($3,500 – $6,124.75) / $3,500 Rate of Return ≈ -75.85%
So, your rate of return on the investment after short selling GE shares is approximately -75.85%. This negative return indicates a loss on your investment due to the decline in the stock price, dividend payments, interest charges, and commissions.
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