Question

SHORT SALES. Define Short Sales.                                            

    i.     Now assume that that you short 4500 shares of AT&T (T) at $25 per share. Your broker has a 40% initial margin. How does this look in the balance sheet?                                            

ii.     Your broker has a maintenance margin of 30%. If the price of the stock falls to $20 per share, what is your new margin? Are you benefited or affected by the price decrease?                                       

iii.     How do you represent it in the balance sheet?

Answer 1

Ans 1 )  

Position : 4500*25=112500

Initial Margin Requirement =112500*.4=45000

• In Balance sheet from Asset side Bank Amount will decrease to 45000 & liability side 45000 decrease in p&l A/c .

Ans 2 ) If Stock Price Decrease to 20 then,

Position = 4500*20 =90000

Maintance Requirement = 90000*0.3

= 27000

Intial Requirement = 90000*0.4 = 36000

Profit in position= 112500 -90000

=22500

• As Price decrease and the position is of Short sell we Benefitted By 22500 profit.

Ans 3) Represent This Entry in Balance sheet

• Asset side Increase 22500 in Cash/Bank A/c
• Liablity Side 22500 Increase in P&L A/C (Profit)