Question

1. You opened an account to short-sell 100 shares of Internet Hopes. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Hopes has fallen from $40 to $30, and the stock has paid a dividend of $2 per share. What is the remaining margin in the account?

Answer 1

When one ordered his broker to short sell  100 shares of Internet Hopes @ 40$ , his account is credited with $ 4000 (100x40). Further he also have to bring margin requirement of 50% in account. Thus margin = 4000 x 50% = $ 2000

Thus total initial asset in account = 4000 + 2000 = $6000

After one year share price fell to $30 , hence one has to buy shares @ 30$ to replace the short position and one has to repay the dividend also of $ 2

Thus Total liability = (100 x 30) + (100 x 2)

= 3000 +200

=3200 $

Thus remaining margin in the account = total initial asset in account - Total liability

= 6000 - 3200

= 2800 $