Question

Suppose that you just short sold 100 shares of Quiet Minds stock for $67.00 per share.

a. If the initial margin requirement is 50%, how much equity must you invest? (Round your answer to the nearest dollar)

Equity            $

b. Construct the balance sheet that corresponds to the transaction.

Assets		Liabilities and Equity
Stock	$	Short position (100 shares)	$
T-bills	$	Equity	$
Total assets	$	Total liabilities and equity	$

c. Now suppose the price of the stock falls to $59 per share. What is your current margin percentage? (Round your answer to 2 decimal places.)

Margin percentage                    %

d. The maintenance margin is 25%. What is the lowest price that will trigger a margin call? (Round your answer to 2 decimal places.)

Stock price            $

Answer 1

Given that 100 shares of Quiet Minds are short sold at a price of $67

a). initial margin = 50%

So, equity invested = 50% of 100*67 = $3350

b). Balance sheet

Stock	$6700	Debt(sgoet position)	$3350
		Equity	$3350
Total asset	$6700	Total liabilities and equity	$3350

c). If stock price fall to $59

Total profit = (selling price - buying price)*number of share = (67-59)*100 = $800

So, new own fund = 3350+800 = $4150

Total portfolio value = 59*100 = $5900

So, margin percentage = 4150/5900 = 70.00%

d). Maintenance margin = 25%

So, margin call will be received at a price of (1+initial margin)*initial price/(1+maintenance margin)

=> Margin call received at 1.5*67/1.25 = $80.40