Problem 1: Short-sales and collateral (3 points) Consider a portfolio consisting
ID: 2781653 • Letter: P
Question
Problem 1: Short-sales and collateral (3 points) Consider a portfolio consisting of a short position in 200 shares of stock "ABC" and the necessary collateral. ABC's per-share price is $40. The proceeds from shorting these shares, along with the 50% margin requirenent, are invested at the risk-free rate and used as col- lateral for the share lender (a) How much cash do you receive from the short-sale? Cash from short-sale: (1 point) (b) Including the cash received from the short-sale and the additional margin required, what is the dollar value of the risk-free investment that is being used as collateral? Value of risk-free investment:(1 point) (c) What is the total market value of your combined portfolio, consisting of both the short position in ABC and the collateral, right after the short sale is completed? Value of portfolio: (1 pointExplanation / Answer
a) Cash we receive from the short sale is $40*200 = $8,000
b) Additional margin required is 50%. So total amount invested in risk free is $12,000 that is being used as a collateral.
c) Right after the short sale is completed, total market value of portfolio is $4,000
We are $12,000 in cash but have to buy back the stock which is still at $40. So 12000-8000 = $4,000