Question

Dr. Gregory House observed that SureWin’s stock is priced at £60 per share. From his analysis, he speculates that the price of the stock will eventually fall to £30 per share. Thus, Dr. House gathers that he can make some profit from the price differences through his broker. Given that his broker requires a 30% maintenance margin requirement and using 100 units of SureWin’s stock:

a) How can Dr. House obtain profit?

b) What is the net profit that Dr. House can obtain after adjusting for a 30% maintenance margin requirement?

Answer 1

a)   By Short Selling

Dr . House can make a profit by Short Selling the Shares. Since he expects the Share price to drop from $60 to $30 eventually.   He can arrange to borrow 100 stocks from a lender and sell it at the prevailing price of 60$ each.
Subsequently when theprice drops to 30$ he can purchase them back from the market at 30$ and deliver the shares to his lender, thus making a profit on $30 per share b)   House's Total Profit $ 3,000
Buy/Sell	Price	No.of Shares	Total Value
sell	$ 60.00	100	$ ,6,000.00	(100X60)
buy	$ 30.00	100	$ ,3,000.00	(100X30)
		Total Profit	$ ,3,000.00	(6000-3000)
The shares can be shorted with an initial margin, i.e. An amount lesser than the ($6000) initial sale value. A margin call will only be initiated if the price goes up beyond a certain level based on the Maintenance margin. No details of the margin shortfall is given