A trader opened an account to short-sell 1,000 shares of a tech stock at $120 per share.

A trader opened an account to short-sell 1,000 shares of a tech stock at $120 per share. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of the stock has risen from $120 to $131.20, and the stock has paid a dividend of $20.00 per share. What is the remaining margin in the account?

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Expert Solution

The initial margin = 1,000×120×50%

= $60,000

As a result of increase in the stock price,trader losses = ($131.20-$120) × 1,000

= $11.2 × 1,000

= $11,200

Therefore margin decreases by $11,200.Moreover trader must pay the dividend of $20 per share to the lender of the shares,so that the margin in the account decreses by an additional $20,000.

Remaining margin = $60,000 - $11,200 - $20,000

= $28,800

Therefore the remaining margin in the account is $28,800

jeff jeffy answered 1 year ago

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