Question

Old Economy Traders opened an account to short-sell 1,000 shares
of Internet Dreams at $35 per share. The initial margin requirement
was 50%. (The margin account pays no interest.) A year later, the
price of Internet Dreams has risen from $35 to $41.50, and the
stock has paid a dividend of $4.40 per share.

**a.** What is the remaining margin in the
account?

Remaining margin $

**b-1.** What is the margin on the short position?
**(Round your answer to 2 decimal places.)**

Short margin
%

**b-2.** If the maintenance margin requirement is
30%, will Old Economy receive a margin call?

Yes | |

No |

**c.** What is the rate of return on the
investment? **(Negative value should be indicated by a minus
sign. Round your answer to 2 decimal places.)**

Rate of return %

Answer #1

Solution
: |

Short Sell of Shares = 1000 @ $35 = $35000 |

Initial margin = 50% * 35000 = $17500 |

A year later price increases from 35 to 41.50, Loss to Old Economy Traders: 1000*(41.50-35)= $6500 |

Moreover, Old Economy Traders must pay the dividend of $4.40 per share to the lender of the shares = 1000 * 4.4 = 4400 |

a. Remaining margin = 17500 - 6500
- 4400= $6600 |

b-1. Margin on the short position
=Equity / Value of shares owed |

b-1. Margin on the short position
=6600/(1000*41.50)= 15.90% |

b-2. Yes. Maintenance margin fall
below the margin requirement of 30%, Old Economy Traders will
receive a margin call |

c. Rate of return on the
investment = (Ending equity – Initial equity ) / Initial
equity |

Rate of return on the investment
= (6600 – 17500 ) / 17500= -62.29% |

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