Question

You are bearish on Telecom and decide to sell short 100 shares at the current market price of $40 per share.

a. How much in cash or securities must you put into your brokerage account if the broker’s initial margin requirement is 50% of the value of the short position?

Initial margin            $

b. How high can the price of the stock go before you get a margin call if the maintenance margin is 30% of the value of the short position? (Round your answer to 2 decimal places.)

Stock price reaches            $

Answer 1

A)Value of short position =Number of shares short * current market price

                                     = 100* 40

                                     = $ 4000

Initial margin = Value of short position * %of Initial margin requirement

                 = 4000*50%

                     = $ 2000

b)Maintenance margin requirement = Value of short position * %of maintenance margin requirement

                          = 4000 *30%

                         =$ 1200

When the balance in margin accounts falls below maintenance margin ,you will get a margin call.

Amount of loss to get margin call = 2000-1200 = $ 800 or 800/100 =$ 8 per share

Price rise required = current price +amount of loss

                           = 40+8

                           =$ 48 per share or above