Microsoft PowerPoint - PoF.ppt

Types of tradesƒ 19

Long position:

owning an asset (e.g. 100 OMV shares)

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Short position / short selling

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Borrow shares from someone (the ow

ner) usually through a broker, i.e.

taking a short position

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Sell (short) these shares, say for x

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Pay dividends to the owner of the shares

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Buy shares back, say for y

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Return the shares borrowed, i.e. closing out the short position

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Profit / loss = x - y - dividends paid

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If the owner wants to sell her shares the broker will simply borrow them from some other costumer. However, if

there are too many short sales and

not enough costumers from whom to bo

rrow shares, the broker may fail to

execute the trade (“

short squeeze

”). In a short squeeze the broker has

the right to force us to close out our short position.

Single-period random cash flows: Stocks