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34 votes
Comcast (CMCSA) is trading at 54.33. You decide to short sell 100 shares of their stock, providing 2850 in collateral to your broker. You hold the short position for one year and expect Comcast to pay a dividend of 1 per share. In one year, the stock price is 56. Assuming the brokerage account pays no interest on your cash, what is your return, relative to your collateral

User Thibaut Guirimand
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2 Answers

6 votes
6 votes

Final answer:

When short selling Comcast (CMCSA), the stock price increased, resulting in a loss for the short seller. After one year, the return on the $2,850 collateral was a loss of approximately -9.37%, including the cost of covering the short position and paying the dividend owed.

Step-by-step explanation:

When short selling 100 shares of Comcast (CMCSA) at $54.33, one would be selling shares not owned with the expectation that the stock price will fall. Instead, after a year, the stock price rose to $56.00. Considering the need to cover the short by buying back the shares at the increased price, and accounting for the dividend payout which the short seller is responsible for paying to the stock lender, we can calculate the return on the initial collateral.



Initial value of shorted stock: 100 shares × $54.33 = $5,433.00

Value of stock when covered (bought back): 100 shares × $56.00 = $5,600.00

Dividends to be paid: 100 shares × $1.00 = $100.00



Total loss due to short position = (Value of stock when covered) + (Dividends to be paid) - (Initial value of shorted stock) = $5,600.00 + $100.00 - $5,433.00 = $267.00



Return on collateral = (Total loss) / (Collateral) × 100 = $267.00 / $2,850.00 × 100 = approximately -9.37%



So, the return on the collateral is a loss of approximately -9.37%, indicating the investment did not yield a positive return and the short seller would owe more than the original collateral supplied when establishing the short sale.

User Zoie
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3.2k points
15 votes
15 votes

Answer: =-9.34%

Step-by-step explanation:

Assuming the brokerage account pays no interest on your cash, the return, relative to the collateral will be calculated as:

= (Short sell price - dividend - Share buy price)/Capital employed

= (5433 - 100 - 5600) / 2850

= -267 / 2850

= -0.09368

=-9.34%

Note:

Short sell price = 54.33 × 100 = 5433

Dividend = 100

Share buy price = 56 × 100 = 5600

User James Milner
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2.5k points