Question

You and your friend Jack have different opinions about Tesla stock price. On Sep. 30, 2020, you did a short sale of Tesla stock at $429.01 for $1000 shares. The same day, Jack bought the Tesla stock at $429.01 for $1000 shares with margin. The initial margin and maintenance margin requirement for short sale is 150%. The initial margin and maintenance margin requirement for long on margin is 30% (assume no interest is charged on long on margin account). Below is the Tesla stock price in the next 2 days:

Oct. 01, 2020          $448.16

Oct. 02, 2020          $415.09

What is your expectation of Tesla stock price change in the future? (1 point)

What is Jack’s expectation? (1 point)

Please calculate your daily margin ratio and Jack’s daily margin ratio for each of the next 2 days

(Oct. 01 and Oct. 02). Please specify if margin call is received and how much money you or Jack

need to deposit into the account after the margin call. (6 points)

If you and Jack both decide to close the account (i.e., selling the stock or covering the short selling position) after receiving the first margin call instead of depositing more money into the account, please calculate returns for both of you. (4 points)

Answer 1

, you did a short sale of Tesla stock at $429.01 for $1000 shares that means i will profit if stock price fall below 429.01,

Hence my expectation for the future price of tesla to go down from 429.01 level.

2)

Jack bought the Tesla stock at $429.01 for $1000 shares with margin means he will profit if prices increses from 429.01.

Hence Jack expects to price to be increse in future from 429.01 level.

3)

As per question intial margin and minimum margin is same hence loss will be deducted from the margin and then with the price new margin amount will be decided and balancing amount shall be paid.

however in usually we see that intital margin is more then maintance margin and if due to mark to market loss amount goes below a maintaince margin then differncial amount is to be deposited as margin call.

	price	Qty	I (short) pl	Jack(long)pl	short margin	account balance	short margin calll	Long requiredmargin	margin avialable	margin requirement
transaction price	429.01	1000			643515	643515		128703	128703
01-Oct-20	448.16	1000	-19150	19150	672240	624365	47875	134448	147853	0
02-Oct-20	415.09	1000	33070	-33070	622635	657435	0	124527	114783	9744

4)

Further if they decide to close their posision after the first call then i would have lost 19150 and jack woul have earned 19150.

you may choose to show this in % also their could be also one approch which shall take % return in the leverage terms (basically we will consider amount of margin paid as investment amount not the real values of security as we have only paid amount of margin from our pocket)

my return	-2.98%
-19150/643515
Jack return	14.88%
19150/128703

we can see in this approch profit of jack is 5 times more then my losess this is becouse of the difference in margin requiment as we can observe same ratio in margin requiremnt also which 1:5 or 30% :150%.