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Answer: CAD 160,000
## Explanation **Step 1: Calculate Gross Profit from Price Movement** - Short position established at CAD 60.00 per share - Position closed at CAD 49.00 per share - Gross profit per share = 60.00 - 49.00 = CAD 11.00 - Total gross profit = 11.00 × 20,000 = CAD 220,000 **Step 2: Calculate Dividend Payments** - Stock pays quarterly dividend of CAD 1.50 per share - Previous dividend was paid 1 week before short position established - During 7-month holding period, two quarterly dividends would be paid: - First dividend: approximately 3 months after position established - Second dividend: approximately 6 months after position established - Total dividend payment per share = 1.50 × 2 = CAD 3.00 - Total dividend cost = 3.00 × 20,000 = CAD 60,000 **Step 3: Calculate Net Profit** - Net profit = Gross profit - Dividend payments - Net profit = 220,000 - 60,000 = CAD 160,000 **Why Other Options Are Incorrect:** - **B (CAD 190,000)**: Assumes only one dividend was paid during the holding period - **C (CAD 220,000)**: Ignores dividend payments entirely - **D (CAD 280,000)**: Incorrectly assumes the manager collects dividends rather than paying them out **Key Concept**: When holding a short position, the short seller must pay any dividends that occur during the holding period to the lender of the shares, which reduces the overall profit from the position.
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A hedge fund manager believes that energy prices are likely to fall due to lower demand for air travel and container shipping. To reflect this belief, the hedge fund manager enters into a short position on 20,000 shares of stock GRY, a large diversified oil and gas producer, at a price of CAD 60.00 per share. Stock GRY pays a regular quarterly dividend of CAD 1.50 per share and its previous dividend was paid out a week before the manager established the short position. Seven months later, the manager closes out the short position when stock GRY is trading at CAD 49.00 per share. Assuming no changes in stock GRY's dividend policy occurred during the past seven months, the manager incurred no borrowing costs, and dividends are paid out on schedule, what is the net profit for the hedge fund manager on the trade?
A
CAD 160,000
B
CAD 190,000
C
CAD 220,000
D
CAD 280,000
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