Question

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. What is the level of equity in client A's account (note: no stock borrow fee has been paid)?

Question 34 options:

	$1,000
	$1,200
	$800
	$1,500

Answer 1

Hello

Your required answer is Option D : $1,500

Initial Margin Requirements = 50% an Maintenance Margin Requirements = 30%

Short Sell Amount = 100 shares * $50 per share = $5,000

Hence, initial equity in A's account = $2,500

And Minimum Equity Requirement = $5000 * 30% = $1,500

Now, loss on trade = [($65 + $2) - $50] * 100 = $1,700

Hence, as the equity in the account will fall below MMR, a margin call will occur and in that case, A have to deposit Fresh equity in his account.

Hence, equity before deposit = $2,500 - $1,700 = $800

Equity after deposit = $1,500

Because client is required to maintain a minimum of MMR all the time.

I hope this solves your query.

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