You lend $2,000 at 12% per year for three months and proceed to short sell Asset XYZ for $2,000 in the cash market. You are required to pay $200 to the lender of Asset XYZ (which is the proceeds the lender would have received). You then immediately buy a futures contract at $1,850 for delivery of asset XYZ in three months (this will cover your short position). What is the net profit or loss from your strategy of lending money, short selling, and buying the futures contract?

Question

Quizplus · Accepted Answer

The net profit from the strategy involves several steps:1. Interest earned on lending $2,000 at 12% per year for three months: $2000 \times 0.12 \times \frac{3}{12} = $60$.2. Cost of paying the lender of Asset XYZ: -$200.3. The difference between short selling Asset XYZ at $2,000 and covering the short position by buying the futures contract at $1,850: $2,000 - $1,850 = $150.Adding these amounts together: $60 (interest) - $200 (payment to lender) + $150 (profit from short selling and futures contract) = $10 net profit.

You Lend $2,000 at 12% Per Year for Three Months