Question

On January 1, you tell your broker to sell short 500 shares of Apple Inc. stock at a price of $200 per share. You use $70,000cash to serve as a margin.

(a)How high can the stock price go before you get a margin call if the maintenance margin is 50%?

(b)Assume that on April 1, a dividend of $5 per share was paid. On May 1, you covered the short sale by buying the stock at a price of $150 per share and returned your borrowed shares.

I.What is the value of your account on May 1 after returning borrowed shares?

II.What is your rate of return(%)from this short sale??

Answer 1

Number of shares = 500

Current Market Price = 200

Initial Margin = 70,000 for share worth 200*500

So the initial margin = 70%

Maintenance margin = 50%

a) Let the price be P where margin call happens

=> 50% = (70000 - (P-200)*500)/(P*500)

=> 250P = 70000 - 500P + 100000

=>P = 226.667

b) Selling price or shorting price = 200

Buying price = 150

Dividend paid = 5 per share

As we have shorted the stock so we are entitled to pay the dividend to the buyer.

Value in account = 70000 + (200 - 150 - 5)*500 = 92500

Return =Value on 1st May - Initial margin amount = 22500

Return % = 22500/70000 = 32.143%