Question

Use the following scenario to answer Parts (d) – (e) You open up a trading account with Merrill Lynch. You have decided to sell short 1,000 shares of Diageo (DEO) at a price of $36. Assume that the initial margin percentage is equal to 55% and the maintenance margin is equal to 35%. (d) How much would you have to deposit into the margin account to open this position? [2 Points] (e) At what share price will you receive a margin call? [6 Points]

Answer 1

Number of shares to be purchased = 1000

Price per share = $36

Total Value of shares purchased =Number of shares * Price per share = 1000 *$36 = $36,000

Initial margin = 55%

Maintenance margin = 35%

d) Amount to be deposited into the margin account to opne the position = Initial Margin * Total Value

= 0.55 * 36000

= $19,800

e) Margin call price = Initial Price * (1 - Initial Margin)/(1 - Maintenance Margin)

= $36 * (1 - 0.55)/(1 - 0.35) = $24.92

Therefore, a margin call will be received when the price of Diageo share falls below $24.92 per share