Question

Last week, you sold 400 shares of ABD stock for $12,400. The sale was a short sale with an initial margin requirement of 70%. The maintenance margin is 40%. Some positive news concerning the company was released last night and the stock price jumped this morning to $38 per share. You decide to close out the account.

QUESTION #2) What is your HPR on this investment?

QUESTION #3) Which of the following prices will lead to a margin call if the maintenance margin is 40%?

#2) HPR = 15.59%

#2) HPR = 34.18%

#2) HPR = -32.26%

#2) HPR = -24.47%

#3) when price is greater than $37.64

#3) when price is greater than $40.74

#3) when price is lower than $35.64

#3) when price is lower than $42.74

Answer 1

no.of.shares = 400

price per share = Total Value / no.of shares = $12400/400 = $31

Initial Margin = .7*12400 = $8680

Maintainance Margin = 40% = 4960

Difference between Initial Margin and Maintainance Margin gives Safe amount i.e = 8680-4960 =3720

therefore Maximum per share variance = 3720/400 = 9.3,

that is price per share + 9.3 gives maximum limit wer margin call will happen = 31+9.3 =40.3 , is wer margin call will happen.

any amount above 40.3 will lead to margin call so for Question Number 3 , Option B, when Price is Higher than $40.74

B) when 400 share sold at $38 , Transaction Value = 38*400 =15200,

total returns is = selling price - buying price = 12400-15200 = -2800,

HPR = -2800/INITIAL MARGIN = -2800/8680 = -.32258 = -32.26%

Holding period return = PROFIT/INITIAL VALUE