Question

An investor short sold 400 shares of Lumber Liquidators stock at $22 a share at an initial margin of 70 percent. The maintenance margin is 35 percent. What is the highest the stock price can go before he receives a margin call?

		$26.22
		$27.70
		$28.16
		$25.48

Answer 1

No of shares short sold = 400, Price of short sale = $22

Short sale proceeds = Initial loan = No of shares short sold x Price of short sale = 400 x 22 = $8800

Initial margin = 70% x short sale proceeds = 70% x 8800 = 6160

In case of short sales

Actual margin = [(Short sale proceeds + Initial margin) - Loan] / Loan

Let P = Price at which margin call is made

At margin call price , Loan = P x no of shares sold sold = 400P

When margin call is made, actual margin = maintenance margin = 35%

35% = [(8800 + 6160) - 400P] / 400P

400P x 35% = 14960 - 400P

140P = 14960 - 400P

540P = 14960

P = 14960 / 540

P = 27.7037 = $27.7 (rounded to two decimal places)

Hence highest price can go before he receives a margin call = $27.7

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