An investor sells a stock short for $36 a share. A year later the investor cover the position at $30 a share. If the margin requirement is 60% what is the oercentage return earned on the investment? now assume the price is at $42 when the investor closes the position
To calculate the percentage return earned on the investment, we need to know the amount of initial investment, the amount required for margin, and the profit or loss made from the transaction.
1. Margin Requirement: The margin requirement is given as 60%.
- This means that the investor needs to cover 60% of the total transaction value initially.
- The remaining 40% is borrowed from the broker.
2. Initial Investment: To calculate the initial investment, we need to determine the total value of the short position at the time of selling.
- The investor sells the stock short for $36 per share, but we don't know the total number of shares.
- However, we know that the investor's initial investment is 60% of the total value.
- Therefore, the initial investment can be calculated using the formula: Initial Investment = (60% / 100%) * Total Value.
3. Profit or Loss: To calculate the profit or loss earned, we need to know the price at which the investor covers the short position.
- In the first scenario, the investor covers the position at $30 per share after one year.
- The profit or loss can be calculated as follows: Profit or Loss = (Initial Investment - Final Value)
4. Percentage Return: To calculate the percentage return earned, we use the formula:
- Percentage Return = (Profit or Loss / Initial Investment) * 100.
Let's calculate the percentage return earned in both scenarios:
Scenario 1: Investor covers the position at $30 when initially selling at $36.
- Initial Investment: Assuming the investor covers 60% of the total position value, the initial investment can be calculated as follows:
Initial Investment = (60% / 100%) * Total Value
Since we don't have the total value, we cannot calculate the initial investment in this case.
- Profit or Loss: The profit or loss can be calculated as follows:
Profit or Loss = (Initial Investment - Final Value)
= (60% / 100%) * Total Value - ($30 per share)
- Percentage Return: The percentage return can be calculated as follows:
Percentage Return = (Profit or Loss / Initial Investment) * 100
Scenario 2: Investor covers the position at $42.
- Initial Investment: As in the previous scenario, we need the total value of the short position to calculate the initial investment.
- Profit or Loss: The profit or loss can be calculated as follows:
Profit or Loss = (Initial Investment - Final Value)
= (60% / 100%) * Total Value - ($42 per share)
- Percentage Return: The percentage return can be calculated as follows:
Percentage Return = (Profit or Loss / Initial Investment) * 100
Please provide the total value of the short position in order to calculate the initial investment and further evaluate the percentage return earned in both scenarios.