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You short-sell 50 shares of XYZ stock at $100 per share. Your broker's initial margin requirement...

You short-sell 50 shares of XYZ stock at $100 per share. Your broker's initial margin requirement is 50% of the value of your short position. You put up cash to satisfy the initial margin requirement.

a) What will be your rate of return (after 1 year) if XYZ stock sells at $110 a share? Assume that you do not earn any interest on your funds in the margin account and that the stock pays a dividend of $1.50 a share at the end of the year.

b) If the maintenance margin is 40%, how high can the stock price rise before you receive a margin call from your broker? Ignore the dividend (for part b) only).

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