Question

6.

You sold short 1000 shares of CSCO common stock on margin at $20 per share. Assume the initial margin is 50%, and the maintenance margin is 40%. Above what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin.

	A.	$14.29
	B.	$16.67
	C.	$20.00
	D.	$21.43
	E.	$50.00

Answer 1

Solution:- Given in Question-

Sort Share = 1000

Price = $20

Initial Margin = 1000 * $20 * 50%

Initial Margin (Loan Amount)= $10,000

To Calculate stock price level would you get a margin call-

Let p is Stock Price-

0.40 = (1000P - $10,000) / 1000P

0.40 * 1,000P = 1,000P - $10,000

400P = 1,000P - $10,000

400P - 1,000P = -$10,000

-600P = -$10,000

P = -$10,000 / 600

P = $16.67

Stock price level would you get a margin call is $16.67

The Correct Answer is point B i.e. $16.67

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