Question

You are bearish on Telecom stock and decide to sell short 400 shares at the current market price of $30 per share. How much cash must you put into your brokerage account if the broker’s initial margin requirement is 30% of the value of the short position? How high can the price of the stock go before you get a margin call if the maintenance margin is 35% of the value of the short position?

Answer 1

Calculate the amount of cash to invest
Amount of cash needed	(400*30*30%)
Amount of cash needed	$3,600
Thus, amount of cash to put in brokerage account would be $3,600
Calculate margin call of stock
Margin call	Initial price*(1-Initial margin)/(1-maintenance margin)
Margin call	30*(1-0.30)/(1-0.35)
Margin call	$32.31
Thus, margin call would be received if price increases to $32.31 or higher