Question

Matt short sold 600 shares of stock at $10.50 a share. The initial margin is 80 percent and the maintenance margin is 50 percent. The stock is currently selling for $6.80 a share. What is Matt's account equity at this time? What is his rate of return? Ignore margin interest.

		$3,070;      25.00%
		$7,260;      35.05%
		$7,260;      44.05%
		$9,950;     -35.24%
		$11,510;   -25%

Answer 1

Given that,

Matt short sold 600 shares of stock at $10.50 a share

So, portfolio value = number of share*price = 600*10.5 = $6300

initial margin = 80%

So, own fund = initial margin*portfolio value = 0.8*6300 = $5040

New share price = $6.80

So, Profit on short position = (old price-new price)*number of share = (10.5-6.8)*600 = $2220

So, New total equity value = own fund + profit = 5040 + 2220 = $7260

rate of return = profit/own fund = 2220/5040 = 44.05%

So, Option C is correct.