Question

Suppose you want to buy 500 shares of Amazon at a price of $2,000 per share. You put up $600,000 and borrow the rest. What does the account balance look like? What is your margin? Show all work.

Suppose that in the previous problem you shorted 500 shares instead of buying. The initial margin is 50 percent. What does the account balance sheet look like following the short? Show all work.

Answer 1

Answer 1st part:

Buy 500 shares of Amazon at a price of $2,000 per share

$600,000 is put up and balance is borrowed.

Value of shares bought = 500 * $2,000 = $1,000,000

Amount borrowed = $1,000,000 - $600,000 = $400,000

Account balance will look like as follows:

Margin = Account equity / Value of shares = $600,000 / $1,000,000 = 60%

Answer 2nd part:

500 shares shorted at a price of $2,000. The initial margin =50%

Value share borrowed that were sold short = 500 * $2,000 = $1,000,000

Initial margin deposit = $1,000,000 * 50% = $500,000

Amount put up =$600,000

Margin available = $600,00 - $500,000 =$100,000

Account balance sheet will look like as follows