Hi guys,
Dumb question but as title suggests. How do you calculate IRRs on a short position? Say you sell short at $100 and cover at $50 in year 3. What is the IRR of this trade?
Given this is a positive inflow upfront then negative outflow at cover, excel doesn’t seem to be able to calculate IRR. If IRR is not the right way to frame this, how do you evaluate individual short position returns?
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The financial calculator can calculate.
Change the sign of your cash-flows and the sign of the IRR you get?
That was my thinking but also need to include the carrying costs.
Upfront investment is the margin/collateral requirements that must be held against the position
you also need to factor in borrowing costs of the security
I think the distinction being drawn is that the IRR on a long trade can be calculated on an unlevered basis and then any amount of leverage can be applied to get a levered return.
A short position cannot be analyzed the same way because leverage / margin is inherent to the position.
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