Question

You are bearish on Telecom and decide to sell short 100 shares at the current market price of $45 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?

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.)

Answer 1

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?

Amount we have to put = Share sale Value * Initial margin

Amount we have to put = 100 * 45 * 50%

Amount we have to put = $2250

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.)

Share sale value on short sell = Shares * (1 - maintenance margin) * margin call price

2250 + 4500 = 100 * (1 + 30%) * margin call price

Margin call Price = $51.92

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