Question

3.) Short Sale with Margin You open a brokerage account and plan to short 100 shares at $1,641.00/share.

1. How much equity (cash) must you deposit in your account in order to execute this trade (assume a 50% initial margin requirement).

2. If the required margin is 25% at what price will you receive a margin call?

3. If the stock price falls to $1400 and you cover your short how much did you make on the trade in dollar terms and what was your rate of return on the trade?

Answer 1

Current share price = $1,641/ share

Number of shares to be shorted = 100

Total value of shares = 1,641 x 100

= $164,100

1.

Initial margin requirement = 50%

Hence, initial margin required to execute the trade = 164,100 x 50%

= $ 82,050

2.

If the required margin is 25%, then margin call will be received when the initail margin falls to 25% i.e. $41,025.

Hence, margin call will be received when the share price rises to 1,641 + 410.25 = $ 2,051.25

3.

If the stock price falls to $1,400 and the short position is covered, then profit per share will be = 1,641 - 1,400

= $241

Hence, total profit earned will be = 241 x 100

= $24,100

Rate of return on trade = Profit earned/ Invested amount

= 24,100/82,050

= 29.37%