You Lend $1,000 at 10% Per Year for Three Months

question 32

Multiple Choice

You lend $1,000 at 10% per year for three months and proceed to short sell Asset XYZ for $1,000 in the cash market. You are required to pay $75 to the lender of Asset XYZ (which is the proceeds the lender would have received) . You then immediately buy a futures contract at $950 for delivery of asset XYZ in three months (this will cover your short position) . What is the net profit or loss from your strategy of lending money, short selling, and buying the futures contract?

• A) $50
• B) $25
• C) $0
• D) -$25

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Definitions:

Cash Dividend

A payment made by a company out of its profits to its shareholders, usually in the form of cash.

Net Income

The total earnings of a company after subtracting all expenses, including taxes, from its total revenues.

Indirect Method

Indirect Method is a way of preparing the cash flow statement where net income is adjusted for non-cash transactions, changes in working capital, and other items to calculate cash flow from operating activities.

Operating Activities

Operating Activities involve the primary day-to-day actions related to producing and delivering a company's products or services, influencing cash flow and operating income.