A hedge fund manager has a negative view of retail stocks right now based on the belief that Amazon will drive many retailers into bankruptcy. To act on his view, the manager sells short 20,000 shares of Target Corp (TGT). The manager finds a broker willing to lend the shares. The current market price is 59.00 and TGT pays quarterly dividends of $0.62 per share. Assume the next dividend takes place 3 months from today, and subsequent dividends follow the same pattern.
Assume the manager maintains the short sale for 6 months. List all transactions involved in the short-sale, holding the position, and closing it out after 6 months.
What is the profit (loss) on the short sale if the market price of TGT is $40.00 when the manager closes the position after 6 months? Assume there is no fee to borrow the stock.
What is the profit (loss) on the short sale if the market price of TGT is $68.00 when the manager closes the position after 6 months? Assume there is no fee to borrow the stock.
Now assume the investor pays approximately $1.70 per share over the 6 months to borrow the stock. This is an approximation based on a 5% borrow fee on $68 for 0.5 years. Re-compute your answers to b. and c. incorporating that fee.