Question

Assume that you just short sold 300 shares of Spencer stock at $120 per share. The initial margin requirement (IMR) is 50 percent and the maintenance margin requirement (MMR) is 30 percent a. What is the margin deposit required for this transaction? (6 pts) b. What will be your rate of return if the stock price goes to $127 per share over the next 60 days and you close your position at the end of that time? (7 pts)

Answer 1

a)

Initial margin requirement = 50%

Total Value of the Shares short sold = $ (300*120) = $36,000

Hence, Initial margin requirement = $ (50% * 36,000) = $18,000

b)

Total loss on the transaction if stock price goes to $127 = $ (120-127) * 300 = ($2,100)

Hence, rate of return = (2,100) / 18,000 * 100 = -11.67% or 11.67% (Negative)

Note: $18,000 is the initial investment made (which is equal to initial margin requirement)