Q&A: when a stock that pays a dividend is sold short...

...who should receive the dividends?

A: Since the lender of the stock is not in possession of the stock when the dividend is paid, s/he will not receive it. Therefore, in order to leave the lender in an equivalent position to not having lent the stock, the short seller must reimburse him for all dividends

Bonus Points

  • The proceeds of the short sale must be kept as collateral
    • must remain in the account of the seller with the broker as security to repurchase the stock later (plus margin for security against losses).
    • can be invested in short-term, risk-free, interest-bearing securities (ie. highly liquid securities) to earn a return for the investor but must be accessible to the broker (in case of emergency liquidation).
  • Short selling is permitted only after an uptick

Category: C++ Quant > Financial Markets

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