Question

Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams at $130 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 $130 to $144.00, and the stock has paid a dividend of $22.00 per share.

a. What is the remaining margin in the account?

(Round your answer to nearest dollar amount and put it in the following format X,XXX. Do NOT record starting 0's.)

Remaining margin            $

b-1. What is the margin on the short position?

(Round your answer to 2 decimal places and put it in the following format XX.XX. Do NOT record starting 0's.)

Short margin              %

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

• No

• Yes

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 and put it in the following format XX.XX. Do NOT record starting 0's.)

Rate of return              %

Answer 1

(a.) Calculation of Remaining Margin

Remaining Margin = Initial Margin - Increase in Price - Dividend paid

Initial Margin = Number of shares * Value per share * Initial Margin %

= 1000 * 130 * 50%

= 65000

Increase in Price = 1000 * (144 - 130)

= 1000 * 14

= 14000

Dividend paid = 1000 * 22

= 22000

Remaining Margin = 65000 - 14000 - 22000

= 29000

(b.) Margin on short position = Equity Value / Number of shares

= (29000 / 144) / 1000

= 201.3888 / 1000

= 0.2014 or 20.14%

(b-2) Yes Old Economy will receive a margin call as it falls below 30%

(c) Rate of Return = Ending Value - Initial Value ) / Initial Value

= (29000 - 65000) / 65000

= -55.38%