Question

You want to short 100 shares of H&B’s stock which is currently selling for $100. The dealer offers you a short position with an initial margin of 50% BUT with a maintenance margin of 40%. You use all of your funds to meet the initial margin. Suppose you are given knowledge of the stock’s future prices but have to act on it today (when stock is $100).

Day 2: $105 Day 3: $110 Day 4: $90

1. Can you make it through margin requirements without adding funds? How much do you need to meet the minimum margin?

2. Suppose your lender invests your collateral and gives you a part of the interest, rebate rate (R). What rebate rate do you require for the position to survive until day 4?

3. Suppose the rebate rate is zero, but a lender offers to give you the money needed to float your position, with the loan and its interest to be paid back on day 4 (after closing out your short). What is the maximum rate of interest you would be willing to pay?

Answer 1

Short Position = $10000
Initial margin = 50%
Maintainance margin = 40%
		IM	Stock Price	Change	Gain/Loss	Balnce
	Day 0	10000	100	0	0	10000
	Day1	0	105	-5	-500	9500
	Day2	500	110	-10	-1000	9000
	Day3

As the maintenance margin is 40%, the requirement of additional funds would be there on Day 2

10000 margin - 1000 Loss MTM = 9000

9000*40% = 3600 Which is below 4000 that is actually required

For the 2nd Part part there is 8% requirement to cover the MTM loss and hence maintain the margin