Question

Please provide an excel file that can answer questions similiar to this one by chaning the data and inputing new data

1.You sell short 100 shares of the GTY stock at $80 per share. Assume your broker requires an initial margin of 40% and a maintenance margin of 25%.

1)If the stock price drops to $70, what is the percentage margin?

Initial total stock value: $80(100)=$8,000

If the stock price drops to $70,

Total stock value: $70(100)=$7,000

Required margin deposit when the short position was entered into: $8,000(.40)=$3,200.

Percentage margin =

2)If the stock price increases above a certain level, P, the percentage margin would drop below the maintenance margin of 25% and you will get a margin call. What is P?

Percentage margin =

3)If the stock price increases to $95, how much money do you have to add to your account to restore the maintenance margin of 25%?

Let this amount to be X.

Percentage margin =

X=675

The TSM Corporation’s stocks are currently selling at $45 per share. You believe that the stock is overvalued and decide to take a short position on the stock. You short 100 shares for a total of $4,500. Your broker borrow this number of shares from his clients, sell them, and deposit $4,500 in your account. You cannot withdraw it. In addition, you must post a margin as collateral. Assume your broker requires an initial margin of 60% and a maintenance margin of 40%.

Percentage margin:

The equity value in account is equal to cash received from the short sale, plus the required margin deposit, minus the value of the stock owed. The initial margin requirement is 60%, so the initial required margin deposit is $4,500(.60)=$2,700. Initially the value of the stock owed is also $4,500.

So initially, the percentage margin is equal to

If the stock price drops to $40,

Percentage margin =

If the stock price increases to $50,

Percentage margin =

If the price increases above a certain level, P, the percentage margin would drop below the maintenance margin of 40% and you will get a margin call. What is P?

Percentage margin =

If the stock price increases to $60, how much money do you have to add to your account to restore the maintenance margin of 40%?

Let this amount to be X.

Percentage margin =

X=1,200

Answer 1

1) Calculation of percentage margin:-

a) Margin deposit when short position entered 8000(.40) = 3200.

New margin when stock price has come down 7000(.40) = 2800.

Percentage margin = (3200-2800)/3200= 12.50%

This 12.50% is also profit margin. New margin required is 2800 ie 40% of 7000.

-------------------------------------------------------------------------------------------------------------

2) Assuming that the stock is maintaining current margin of 40% on Stock at $70 and quantity of 100 shares.

=> 70*100*.40= 2800

Minimum margin to be maintained is 25%. Margin call come, if stock price moves above 112.

=> p*100*.25=2800

Calculate P=2800/(100*.25)= 112.

Therefore , P = 112.

---------------------------------------------------------------------------------------------

3) If stock price moves to $ 95, and requried margin of 25%.

= > 95*100*.25= $ 2375 , New margin required in case so stock raises to $95.

Intial margin maintained of stock is at 40% ie $2,800 (at stock $70)

Additional margin depoist is not required as initial margin is in excess of $2375.

-----------------------------------------------------------------------------------------------------------------

TSM Corpotation:

1) Initial margin of 60%

2) Equity Value = 45*100 + 4500*.60 - 4500 = 2700.

Initial margin is equal to 60%.

3) Stock price drops to $ 40.

=> (45-40)*100= 500 (Gain due to fall in stock price)

Margin = (2700+500)/4500= 71.11%

4) If stock price increases to $ 50.

Margin required => (45-50)*100=-500 (Loss)

Margin = (2700-500)/4500= 48.89%

5) If the price increases above a certain level, P

Initial margin = 45*100*.60= 2700

Calculation of P

P*100*.40= 2700

P = 2700/(100*.40) = $67.5.

P = $ 67.50.

6) If stock price increases to $60.

Initial margin => 45*100*.60 = 2700

Margin if stock price increases to $ 60

=60*100*.40= 2400.

As initial margin is greater then $ 2400. Amount to be added is NIL.