Question

Peter is a student at University and is now taking the Security Analysis and Portfolio Management course. He has a brokerage account and wants to apply what he learns in class to the real world. After much analysis, he decides to sell short 100 shares of VTX at the current market price of $80 per share. The broker’s initial margin requirement is 60%. Please help solve the following questions for Peter.

One month later, the price has risen from $80 to $90 per share. Would Peter receive a margin call if the broker’s maintenance margin requirement is 40%? Please explain.

Answer 1

sell short 100 shares of VTX

current market price = $80

Broker’s initial margin requirement = 60%

Cash or securities value= 100*$80*60% =$ 4800

Margin available at the beginning = $ 4800

One month later price rises, then Available margin will be =$4800-100*($90- $80)

Available margin = $4800-100*($10)

Available margin =$3800

Broker’s maintenance margin requirement = 40%

Margin call will be received when margin fall below=100*$80*40% i.e.$3200

Since margin available ($3800) is more then required margin ($3200), margin call will not be made.

Please give thumbs up. It will help me.