Chapter 3: Short Sales
1. Suppose you sell short 100 shares share of stock initially selling for $100 a share. Your
initial margin requirement is 50% of the value of the stock sold. You receive no interest
on the funds placed in your margin account.
a. How much do you need to contribute to your margin account?
Initial Short: $100 100 shares $10,000
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b. What will be your rate of return for the following stock prices at the end of a 1-
year holding period? Assume the stock pays no dividends.
Set dividends to $0.00
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2. Repeat question 1 but now assume that the stock pays dividends of $2 per share at year-
end. What is the relationship between the total rate of return on the stock and the
return to your short position?
