Question

You are bearish on Telecom and decide to sell short 100 shares at the current market price of $41 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?

Answer 1

a.

Value of position = number of shares short * price of short

=100*41

=4100

Initial margin is 50%

So amount put into brokerage account = value of position * intial margin

=4100*50%

=2050

So  cash or securities of $2050 must you put into your brokerage account.

b..

intial margin = $2050

maintenance margin 30% of positon = 4100*30% =1230

contract size = 100 shares

Price to make margin call for short contract = Short future price + (initial margin - maintenance margin)/contract size

=41 + ((2050-1230)/100)

=49.2

So price can go high to $49.20 before margin call is received.