Suppose that you sell short 250 shares of Xtel, currently selling for $70 per share, and give your broker $10,000 to establish your margin account. a. If you earn no interest on the funds in your margin account, what will be your rate of return after one year if Xtel stock is selling at: (i) $78; (ii) $70; (iii) $64? Assume that Xtel pays no dividends. (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.)

i = 20%

ii= 0%

iii= 15%

Explanation:

First, short selling representsthe selling borrowed securities in order to repurchase them after some time. These securities are not owned, but borrowed instead. The idea is to sell when its price is high and then re-purchase in the future when the price is lower.

a) Determine the return after a year as follows

The number of shares = 250

The price per share =$70

Rate of return is calcuated by the following:

(Number of shares sold short x changes in price) / Margin account amount

We use the three different cases as given in the question

Case 1 - $78

Rate of Return = 250 shares x ($70- $78)/ $10,000

Rate of Return = 250 shares x (-$8)/$10,000

= -$2000/ $10,000 = 0.2 or 20.00%

Case 2 - $70

Rate of Return = 250 shares x ($70- $70)/ $10,000

Rate of Return = 250 shares x ($0)/$10,000

= $0/ $10,000 = 0.00%

Case 3 - $64

Rate of Return = 250 shares x ($70- $64)/ $10,000

Rate of Return = 250 shares x ($6)/$10,000

= $1500/ $10,000 = 0.15 or 15.00%