Question

In: Finance

You are bearish on Telecom and decide to sell short 100 shares at the current market...

You are bearish on Telecom and decide to sell short 100 shares at the current market price of $39 per share.

a. How much in cash or securities must you put into your brokerage account if the broker’s initial margin requirement is 50% of the value of the short position?

b. How high can the price of the stock go before you get a margin call if the maintenance margin is 30% of the value of the short position? (Round your answer to 2 decimal places.)

Solutions

Expert Solution

a]

cash/securities to deposit = number of shares * selling price per share * initial margin%

cash/securities to deposit = 100 * $39 * 50% = $1,950

b]

Price change that would lead to margin call = (initial margin - maintenance margin) / number of shares

maintenance margin =  number of shares * selling price per share * maintenance%

maintenance margin =  100 * $39 * 30% = $1,170

Price change that would lead to margin call = ($1,950 - $1,170) / 100 = $7.80

Price at which margin call is triggered = selling price per share + price change that would lead to margin call

Price at which margin call is triggered = $39 + $7.80

Price at which margin call is triggered = $46.80

jeff jeffy answered 2 years ago
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