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Homework answers / question archive / Mr  Gilbert believing that the price of Caterpillar which is $ 160 today will go down significantly decides to short sell 200 shares of Caterpillar by borrowing them from his brokerage house A) How much collateral must be shown by Mr

Mr  Gilbert believing that the price of Caterpillar which is $ 160 today will go down significantly decides to short sell 200 shares of Caterpillar by borrowing them from his brokerage house A) How much collateral must be shown by Mr

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Mr  Gilbert believing that the price of Caterpillar which is $ 160 today will go down significantly decides to short sell 200 shares of Caterpillar by borrowing them from his brokerage house

A) How much collateral must be shown by Mr.Gilbert for his short sale operation?

B) What will be the net profit of Mr. Gilbert if Caterpillar goes down to $140 after two months and if the annual interest rate in US for short sale operations is 4.8%?

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A) Mr Gilbert should give collateral of $32000 i.e. (200*$160) for his short sale operation as he would require at least that much amount of income or much higher amount as may be required by him.

B) Assuming shares are short sale at current price that is at $160.

Profit from short sale operation , if price goes down at $140 = $[(160-140)*200] = $4000

Annual interest income from short sale operation = $(4000*4.8% *2/12) = $32

Net profit = $3986

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