Question

# You sold short 400 shares of a stock for \$60 per share. Your broker’s initial margin...

You sold short 400 shares of a stock for \$60 per share. Your broker’s initial margin requirement is 60%. The broker’s maintenance margin requirement is 35%. You initially want to put up as little capital (money) as possible to support the short sale. A.) How much capital must you have in your account before you can make the short sale? B.) If the stock price goes to \$70 per share, will you receive a margin call? Show your work to support your answer. C.) If one year later you covered your short position at \$52 per share, what rate of return will you receive on your investment if the company’s stock that you shorted paid total dividends of \$0.50 per share during the time you held the stock short? Assume there are no broker transaction charges.

 A) Capital to be had in the account = 400*60*60% = 14400 B) Balance in the margin account = 14400-400*(70-60) = 10400 Maintenance margin required = 400*70*35% = 9800 As the balance in the margin account is more than the maintenance margin required, no margin call will be received. C) Gain on covering = 400*(60-52) = 3200 Dividends received = 400*0.5 = 200 Total gain 3400 Rate of return = 3400/14400 = 23.61%

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