Short Sales
Short selling: I want to sell an asset I don't own. - I borrow the asset from someone who does own it - I sell the asset today, and get cash now I buy it back in one month, paying cash for it, and return it to the person I borrowed it from (the lender) If the asset paid dividends in that month, I must pay them to the lender As far as the lender is concerned, the asset never left his hands
I sell G00G short at $3. In 1 month, it pays a dividend of $0.5. Its price is $4 at the end of the month. I buy it back. - What do my cash flows look like? What is the amount I made per dollar I shorted? What would someone who bought the share have made per dollar invested? What about if its price had fallen to $1/share? What do my cash flows look like? What is the amount I made per dollar I shorted? What would someone who bought the share have made per dollar invested? Why would anyone ever short sell anything?
Zero coupon bond
Asset that promises to pay "face value" at "maturity" No payments before then Why would you buy such a bond? Where do they come from? Issued in primary markets Treasury bills, < 1 year Stripping of coupon bonds Treasury notes (1-10 years), treasury bonds (>10 years)
Short selling risk free
A risk free ZCB matures in one year, and will pay $1000 at maturity. Its price is $965 What are your cashflows if you: : Buy the ZCB (and sell just before maturity) : Short-sell the ZCB (and close out just before maturity) What is the risk of these cashflows? What do these cashflows remind