Assume you sell short 1,000 shares of common stock at $35 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $25 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) 20.47%
B) 25.63%
C) 57.14%
D) 77.23%

Question

Quizplus · Accepted Answer

The initial value of the short sale is 1,000 shares * $35/share = $35,000. With a 50% margin requirement, you would have had to deposit $17,500. If you repurchase the stock at $25 per share, the total cost is 1,000 shares * $25/share = $25,000. The profit from the transaction is the difference between the initial sale and the repurchase price, which is $35,000 - $25,000 = $10,000. The rate of return is the profit divided by the initial margin requirement: $10,000 / $17,500 = 0.5714, or 57.14%.

Assume You Sell Short 1,000 Shares of Common Stock at $35