Assume that an investor lends 100 shares of Jiffy,Inc.common stock to a short seller.The bid-ask prices are $32.00 - $32.50.When the position is closed,the bid-ask prices are $32.50 - $33.00.The commission rate is 0.5%.The market interest rate is 5.0% and the short rebate rate is 3.0%.Calculate the gain or loss to the lender.Assume the lender is not subject to a bid-ask loss or commissions.
A) $164.00 gain
B) $164.00 loss
C) $100.00 gain
D) $100.00 loss

Question

Quizplus · Accepted Answer

The first step is to calculate the proceeds from lending the stock:
100 shares x $32.50 = $3,250

Next, we need to calculate the cost of borrowing the stock:
100 shares x $32.00 = $3,200
Interest cost = $3,200 x 5% x (number of days borrowed/365) = $2.19

The short seller will pay a rebate to the lender for borrowing the shares:
100 shares x $32.50 x 3% x (number of days borrowed/365) = $2.74

The net gain for the investor is:
Proceeds - Interest cost + Rebate - Commission
$3,250 - $2.19 + $2.74 - ($3,250 x 0.5%) = $164.00 gain

Assume That an Investor Lends 100 Shares of Jiffy,Inc