Question

In: Finance

1. Which of the following statements are true about short selling? Check all that apply: The...

1. Which of the following statements are true about short selling?

Check all that apply:

The investor involved in short selling anticipates that the share price will fall.

Short selling is the sale of a security that is not owned by the seller.

The investor involved in short selling anticipates that the share price will increase.

Short selling means that an investor purchases securities using funds borrowed from her broker.

Short sellers borrow securities and sell them immediately.

2. The price of Apple stock is currently $104.79 and you decide to sell short 500 shares. The inital margin is 60%.

a. How much money do you have to contribute at least to the account?

b. If the price rises to $116.98, what is the new percentage margin?

c. If the broker's maintenance margin is 30%, what is the maximum value the stock price can take before you are issued a margin call?

3. You sell 780 shares of stock short at a price of $39.65. The initial margin requirement is 50% and the maintenance margin is 20%.

a. How much money do you have to add to the account to meet the inital margin requirement?

b. At what price will you first receive a margin call?

Solutions

Expert Solution

1

The investor involved in short selling anticipates that the share price will fall. TRUE

Short selling is the sale of a security that is not owned by the seller. TRUE

The investor involved in short selling anticipates that the share price will increase. FALSE. short seller anticipates that the share price will fall

Short selling means that an investor purchases securities using funds borrowed from her broker. FALSE. Short selling means investor borrows securities and sell the them

Short sellers borrow securities and sell them immediately. TRUE

2. Initial Margin = current value of stock to be short x Initial Margin %

Initial Margin = 104.79 x 500 x 60% = $ 31,437

Price raises to $116.98, new % margin = margin / new value = 31437 / (116.98x500) = 53.74%

if maintenance margin is 30%,

amount of loss after which margin amount will be called = 104.79 x 500 x (60%-30%) = $15,718.50

Therefore, maximum value the stock price can fall = 15718.50 / 500 = 31.43

Therefore maximum value the stock price can take before you are issued a margin call = 104.79 + 31.43 = $136.22

3.

a. Initial Margin = current value of stock to be short x Initial Margin %

Initial Margin = 39.65 x 780 x 50% = $ 15,463.50

b. if maintenance margin is 20%,

amount of loss after which margin amount will be called = 39.65 x 780 x (50%-20%) = $ 9,278.10

Therefore, maximum value the stock price can fall = 9,278.10 / 780 = 11.89

Therefore maximum value the stock price can take before you are issued a margin call = 39.65 + 11.89 = $ 51.54

Thumbs up please if satisfied Thanks :)

Comment for further doubts

jeff jeffy answered 2 years ago
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