Question

You are bearish on Telecom and decide to sell short 240 shares at the current market price of $85 per share.

a. How much in cash or securities must you put into your brokerage account if the broker's initial margin requirement is 50% of the value of the short position? (Round your answer to the nearest whole dollar.)

Cash or securities to be put into brokerage account : ______________

b. How high can the price of the stock go before you get a margin call if the maintenance margin is 30% of the value of the short position? (Round your answer to 2 decimal places.)

Margin call will be made at price : _____________

Answer 1

a. Initial margin = 50% of the total equity value

= 0.50 * (240 * $85)

= 0.50 * $20,400

= 10,200

Total value of the account = Stock value + Initial margin

= (240 * $85) + 10,200

= $20,400 + $10,200

= $30,600

b. Maintenance margin requirement = 30% on the value of short position

= 0.30 * $20,400

= $6,120

Hence, we will get maintenance call if we have only $6,120 left in our account.

Loss suffered on our position = Initial margin requirement - Maintenance margin requirement

= $10,200 - $6,120

= $4,080

No. of shares shorted = 240

Share price should be increased by = Loss suffered / No. of share shorted

= $4,080 / 240

= 17

Share price should go upto = $85 + $17

= $102