Question

# ABC stock is currently selling for a price per share of \$50. It has announced (not...

ABC stock is currently selling for a price per share of \$50. It has announced (not yet paid though) its annual cash dividend of \$2 per share. To short the stock, the broker charges the client a fee (stock borrow) of 1% p.a, charged at the time the position is covered. The broker IMR is 50% and MMR is 30% for short sales.

Client A sells short 100 shares of ABC stock at \$50. A month later, right after the company paid the dividend, the stock makes a new high of \$65 per share. To restore a 30% margin, how much cash would client A have to inject into the account (note: no stock borrow fee has been paid)?

Question 35 options:

 \$700 \$950 \$1,350 \$1,150

Solution :-

The Initial margin at the time of taking short position = 50\$ * 100 shares* 50% = 2500\$

Net balance = \$2700

The new price of share = \$65

Notional loss = (65-50)*100 = 1500

The notional balance = 2700 - 1500 = 1200

The maintenance margin is 30% = 50\$ * 100 shares * 30% = 1500

Now the balance is below the maintenance margin so now need to maintain a balance upto initial margin

initial margin = 50\$ * 100 shares * 50% = 2500

Therefore amount needed to add = 2500 - 1200 = 1300

The brokerage cost = 50*100 * 1% = 50

Therefore total cash client A would add = 1300+50 = 1350

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