Question

Please include work

Suppose that you sell short 500 shares of Intel, which is currently selling for $20 per share. Your broker requires 40% initial margin in short sales, which you covered using the T- bills in your account. Assume that the maintenance margin is 20%.

How high can Intel's price rise before you get a margin call?

How much money would you have to put into your account in order to satisfy the maintenance margin requirement if the price suddenly jumped to $31 a share?

Answer 1

Q1

A=40% initial margin in short sales=500shares*20

=$4000

r=shares=500

(S)Total Sale+Broker margin= 20*500+A=10000

P=$20(Per Share)

Margin Call:

The high intel price is

P((S+A)-r*P)/(r*P)

20(10000+4000 – 500 * 20)/(500 * 20) = $8

The price of intel share at the time of margin call is (20+8)= $28.

Q2.

The maintanence margin is 20%

if the share price is 20per share, then the margin amount was (500*20)*20%=2000

if the share price jump to $31per share, then the margin amount will be (500*31)*20%=3100

So the money have to put in to the account is(3100-2000)= $1100