MATBUS470 Lecture Notes - Lecture 4: Spot Contract, Compound Interest, Risk-Free Interest Rate

• School: University of Waterloo
• Department: Mathematical Business
• Course: MATBUS470
• Professor: Keith Freeland

Document Summary

Selling a security you don"t own, your broker borrows the security from another client. You must pay any dividends or other bene ts the owner would have receive if they own the stocks. Short 100 shares when the price is , 3 months later when the price is , we close the position. During the 3 months a dividend of per share is paid. What is the pro t? how does this compare to buying 100 shares. Borrowed: * 100 = 10000 worth of shares. 3 months later, when returning the shares: * 100 = -. Dividend given out = * 100 = -. If you buy 100 shares cost = * 100 = -. After 3 months = * = 9000 dividend = 3*100 = 300. F0 = futures price or forward price, determined by today, at t = 0.