Assume you sell short 100 shares of common stock at $45 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $40 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction.
A) 20.03%
B) 25.67%
C) 22.22%
D) 77.46%

Question

Quizplus · Accepted Answer

The rate of return on a short sale is calculated by the formula: [(Initial Price - Final Price) / Initial Margin Requirement]. Here, the initial price is $45, and the final price is $40, so the profit per share is $5. The initial margin requirement is 50% of $45, which is $22.50 per share. Therefore, the rate of return is ($5 / $22.50) * 100 = 22.22%.

Assume You Sell Short 100 Shares of Common Stock at $45