Balance sheet for long and short stock positions

[Liming]

Dear David,

For a typical long and short stock positions as described in page405 of FRM handbook (5th), where initial capital is $100, and long $100 worth of stock as well as short $100 worth of stock, can I interpret the scenario as follows?

1) the entire amount of $100 goes to purchase $100 stock, establishing $100 long stock position
2) enter a stock loan agreement for $100 worth of stock, establishing $100 short stock position
3) short sell the borrowed stock for $100 proceeds
4) assuming cash flows occurs simultaneously, the entire amount of $100 proceeds are used to lend to stock lender
5) half the long stock position is used to cover margin account with the short sell broker.

As a result, the combined positions in a balance sheet can be summarized into

Asset: $100 long stock & $100 cash let to stock owner
Liability: $100 short stock & $100 equity

Thank you!

Cheers!
Liming
09/10/2009

 

[David Harper CFA FRM]

Hi Liming,

Yes, I agree with that (i think Jorion maybe simplifies a bit for clarity vis a vis journal entries) ... I might offer a tiny (nit) revision which doesn't really change anything:

2) enter a stock loan agreement for $100 worth of stock, establishing the $100 asset (cash lent to stock owner)
3) short sell the borrowed stock for $100 proceeds, establishing the $100 liability (short stock)

...so I guess, ultimately, it is the same as the short $100 transaction but additionally the long transaction (+$100 equity) covers the 50% margin...David