Question

Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams at $115 per share. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from $115 to $124.20, and the stock has paid a dividend of $19.00 per share.

a. What is the remaining margin in the account?

Remaining margin            $

b-1. What is the margin on the short position? (Round your answer to 2 decimal places.)

Short margin             %

b-2. If the maintenance margin requirement is 30%, will Old Economy receive a margin call?

	Yes
	No

c. What is the rate of return on the investment? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)

Rate of return             %

Answer 1

A. Initial margin requirement is 50%,

which will be 50%* 1000 *$115 = $57,500

The price of shares increased from $115 to $124.2,

so, there is an increase of $9,200 in the account.

Also a dividend of $19, so total dividend is $19000

So, remaining margin is = $57,500 - $19,000 - $9200

=$29,300

b1 :Margin on short position: Equity/ value of shares owned

=$29,300/$124200

=23.59%

b- 2 .As the margin has fallen below the required level(30%) , yes the trader will receIve a margin call.

C. Rate of return percent is :

(Ending equity - Initial equity/ initial equity ) * 100

=$29,300 - $57,500/ $57,500 *100

=-49.04%