Question

Question 1

a. You sell short 100 shares of stock at a price of $100 per share with an initial margin of 65 percent and maintenance margin of 25 percent. Show this in a “T” balance sheet format, and calculate your margin.

Price = 100
Credit for short sale Cash Deposit =	Liability: Market Value of short sale Equity =
Total Assets =	Liabilities + Equity=

b. Margin =

c. If the price falls to $90 per share, show this in a “T” balance sheet format, and calculate your margin.

Price = 90
Credit for short sale = Cash Deposit =	Liability: Equity =
Total Assets	Liabilities + Equity =

d. Margin =

Answer 1

Part (a).

Credit for short sale cash deposit = 10000	Liability (Market value of short sale) = 10000
	Equity = 0
Total Assets = 10000	Total L & E = 10000

In this case the Equity component is akin to profit (or loss) on the short position. When the position is in the money the "Liability" item will be less than 10000 and the balancing item will be the profit shown under "Equity" and vice versa.

Part b: Since the position is being initiated, the required margin will be based upon initial margin which is 65%. Hence the margin to be kept with the broker will be (100*0.65* 100 shares) = 6500

Part c:

Credit for short sale cash deposit = 10000	Liability (Market value of short sale) = 9000
	Equity = 1000
Total Assets = 10000	Total L & E = 10000

In this case the stock price has declined to $ 90 and since this is a short position, it means profit for the investor of (100-90)*100 =1000 and the Liability term which captures the market value of payable on the short will reduce to $ 9000.

Part d: The required margin will also reduce to (90*25%*100) = $ 2250 instead of (100*25%*100 shares) = 2500; hence the margin can be reduced by $ 250 from the initial margin levels.