Question

Mr. Sam opened an account to short-sell 50,000 shares of MSFT at $60 per share. Assume that the margin account pays no interest, and that the initial margin requirement was 60%. 1. What is the initial margin invested by Mr. Sam? 2. If after one year, the price of MSFT has risen from $60 to $66, and the stock has paid a dividend of $1 per share. a) What is the remaining margin in the account in dollars and as a percentage? What is the rate of return on the investment? b) If the maintenance margin requirement is 30%. At what price Mr. Sam will receive a margin call?

Answer #1

1. Value of Short Sell contract = 50000 shares* $60/share = $3,000,000

Initial margin required = 60% of $3 million = **$1.8
million or $1,800,000**

2. Mr. Sam lost $6 on the price and $1 on the dividend per share on the short sell,

So, total loss = $7/share * 50000 shares = $350,000

a) Remaining margin = $1800000 - $350000 =
**$1,450,000**

**Margin %** = 1450000/(66*50000) =
**43.94%**

Rate of Return on Investment = -$350000/1800000 = **-
19.44%**

**b) Let share price be $X when maintenance margin =
30%**

**Loss on portfolio = (X-60)*50000 + 50000
(dividend)**

**and remaining margin = 1800000 - (X-60)*50000 -
50000**

**So, (****1750000 - (X-60)*50000)/(50000*X)
= 30%**

**=> (95-X)/X = 0.3**

**=> X = 95/1.3 = 73.07**

**So, when the share price reaches $73.07 , there will be
a margin call**

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