Explanation:
A is correct. To establish the short position, the manager borrowed and sold the 20,000 shares at CAD 60 per share. Seven months later, the manager bought the shares back at CAD 49 per share for a gross profit of CAD 11 per share. However, the holder of a short position is required to pay out to the lender of the shares any dividends that take place while the position is active. Because the last dividend was paid a week before the short position was established, the stock paid two quarterly dividends of CAD 1.50 per share during the 7-month holding period, or a total of CAD 3.00 per share.
Therefore the hedge fund manager has a net profit of .
B is incorrect. It assumes only one dividend was paid out by the manager.
C is incorrect. It ignores the dividends.
D is incorrect. It assumes the manager collects and does not pay out the dividends.
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Q-13. 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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