Question

Theo sells a stock short with a current price of 25,000 and buys it back forXat the end of 1 year. Governmental regulations require the short seller todeposit margin of 40% at the time of the short sale. No dividends incurred.The prevailing in

Answer 1

$23,300

Step-by-step explanation:

Missing word "The prevailing interest rate is an 8% annual rate, and Theo earns a 25% yield on the transaction. Calculate X."

Stock short sell amount = $25,000

Margin required = 40%

Margin = $25,000 * 40%

Margin = $10,000

Interest = 8%

Interest earned (on margin) = $10,000 * 8%

Interest earned (on margin) = $800

Yield on transaction = 25%

Yield = [(Stock short sell amount - Buyback amount + Interest on margin) / Margin required.] While assuming buyback amount to be X)

0.25 = ($25,000 - X + $800) / $10,000

$2,500 = $25000 - X + $800

X = $25,000 + $800 - $2,500

X = $23,300