Question

Please include formulas and work

Suppose that you sell short 500 shares of Intel, which is currently selling for $20 per share. Your broker requires 40% initial margin in short sales, which you covered using the T- bills in your account. Assume that the maintenance margin is 20%.

How high can Intel's price rise before you get a margin call?

How much money would you have to put into your account in order to satisfy the maintenance margin requirement if the price suddenly jumped to $31 a share?

Answer 1

Answer :-

Part (1)

Intel's price rise before you get a margin call = Current Price ( 1 + Initial margin) / (1 + maintenance margin)

Intel's price rise before you get a margin call = $20 (1,40) / (1.20)

Intel's price rise before you get a margin call = 28 / 1.20

Intel's price rise before you get a margin call = $23.333.

Part (2)

Money you have to put into your account in order to satisfy the maintenance margin requirement if the price suddenly jumped to $31 a share = $1100

Calculation :-

Maintenance margin = 20%

Therefore,

Maintenance margin deposited before must be 20% of ($20 x 500 shares) = $2000

Now share price moved to $31, Hence we have to calculate Maintenance margin required at $31 per share.

Maintenance margin required now is 20% of ($31 x 500 shares) = $3100

Therefore;

Additional Money you have to put into your account = $3100 - $2000

Additional Money you have to put into your account = $1100