Suppose you short-sell 100 shares of a stock at $55 with a commission charge of 0.5%. You also payu commission charge for purchasing the stock to cover the short-sale. What is your profit if you close the short-sale at $54?
For example, let us suppose that an investor wants to accumulate $1,000 in five years and that the interest rate is 5%. How much does he/she need to set aside annually in order to accumulate $1,000 at the end of five years? (Sinking fund calculation)
45600
To calculate your profit from a short-sale, you need to consider the initial cost of shorting the stock, any additional commission charges, and the difference between the initial selling price and the closing purchase price.
Let's break it down step by step:
1. Calculate the initial cost of shorting the stock:
The initial cost can be calculated by multiplying the number of shares (100) by the selling price ($55).
Initial cost = Number of shares x Selling price
= 100 x $55
= $5500
2. Calculate the commission charges for shorting the stock:
The commission charge for shorting is 0.5% of the initial cost.
Commission charge for shorting = 0.5% x Initial cost
= 0.5/100 x $5500
= $27.50
3. Calculate the commission charges for closing the short-sale:
Assuming the commission charge for the closing purchase is the same as the commission charge for selling, the commission charge for closing the short-sale is also $27.50.
4. Calculate the cost to close the short-sale:
The cost to close the short-sale can be calculated by multiplying the number of shares (100) by the purchase price ($54).
Cost to close short-sale = Number of shares x Purchase price
= 100 x $54
= $5400
5. Calculate the profit:
Profit = Initial cost - Commission charges for shorting - Commission charges for closing the short-sale - Cost to close short-sale
= $5500 - $27.50 - $27.50 - $5400
= $18
Therefore, your profit from closing the short-sale at $54 would be $18.