Eight months ago, you sold short 1,000 shares of ABC Company at $30 per share. The...

Eight months ago, you sold short 1,000 shares of ABC Company at $30 per share. The initial margin requirement is 50% and maintenance margin is 30%. Ignoring borrowing cost of the shares,

a) calculate the price level that you receive margin call.
b) calculate the (i) holding period percentage return and (ii) annual percentage return (APR) of your margin position if you close the margin position at $28 today, immediately after dividend of $1 per share was paid by the Company.

Expert Solution


				SHORT 1000 SHARES

				X	Y=1000*X	A	B=A*1000	D	E=Y*30%
			Trade Price per Share	Settle Price per share	Account Value	Gain/(Loss) per share	Total Gain/(Loss)	Margin Balance	Maintenance Margin
			$30.00		$30,000			$15,000	$9,000
				$34.70	$34,700	($4.70)	($4,700)	$10,300	$10,410
				$28.00	$28,000	$2.00	$2,000	$17,000	$8,400

a)	Price of $ 34.70 will trigger margin Call

b)	HOLDING PERIOD RETURN
	Initial Investment	$15,000
	Total Dividend=$1*1000	$1,000
	Net Gain =$2000-$1000=	$1,000
	Holding Period Return =1000/15000=	6.67%

	Annual Percentage Return =6.67*(12/8)=	10.00%

jeff jeffy answered 1 year ago

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