Question

Josh Next opened an account to short-sell 3,000 shares of Sun Spots Co.. The initial margin requirement is 50 percent. (The margin account pays no interest). A year later, the price of Sun Spots has risen from $45 to $50, and the stock has paid a dividend of $3 per share.

1. What is the remaining margin in the account (in dollars and percentage)?

2. If the maintenance margin requirement is 25 percent, will Josh Next receive a margin call?

3. What is the rate of return on the investment?

Answer 1

Value of short sale = P x N = 3,000 x 45 = 135,000

Initial margin = Value oif short sale x initial margin required = 135,000 x 50% = 67,500

the remaining margin in the account (in dollars) = Initial margin + Gain / (Loss) in position = 67,500 + (P0 - D - P1) x N = 67,500 + (45 - 3 - 50) x 3,000 =  43,500

the remaining margin in the account (percentage) = Reminaing margin in dollar / current valuation = 43,500 / (P1 x N) = 43,500 / (50 x 3,000) = 29.00%

Since the remaining margin = 29% > the maintenance margin requirement of 25%, Josh Next will not receive a margin call.

Rate of return = (P0 - D - P1) / (P0 x 50%) = (45 - 3 - 50) /(45 x 50%) = -35.56%