Question

Assume that you open a 100 share short position in Jiffy Inc. common stock at the bid-ask price of $32.00 - $32.50. When you close your position the bid-ask prices are $32.50 - $33.00. If you pay a commission rate of 0.5%, calculate your profit or loss on the investment position

Answer 1

There is a net loss of $132.50

Step-by-step explanation:

First, we need to determine the cash flows at the time of open the position and close the position.

Cash outflow

Cash flow from opening the position = Value of position + Commission

Where

Value of position = Numbers of shares - opening value per stock = 100 x 33 = $3,300

Commision = 100 x 33 x 0.5% = $16.50

Placing values in the formula

Cash flow from opening the position = $3,300 + $16.50 = $3,316.50

Cash inflow

Cash flow from Closing the position = Value of position - Commission

Where

Value of position = Numbers of shares - opening value per stock = 100 x 32 = $3,200

Commision = 100 x 32 x 0.5% = $16

Placing values in the formula

Cash flow from opening the position = $3,200 - $16 = $3,184

Now calculate the profit or loss on the position

Net profit / loss = Cashinflow - Cash outflow = $3,184 - $3,316.50

Net Loss = $132.50