Question

Do not use excel please, show work

Short Position Name: Date: Suppose that an investor sells 400 shares short at S50 per share. The initial margin is 50% and the maintenance margin is 30%. After 125 days, the investor purchases the shares for S40 and closes the short position. During the holding period, the shares paid a dividend of $2.50 per share. Show the calculations for the numbers that you enter in the "T" accounts a. Show the investor's beginning "T" account (cales here) b. At what price would the investor receive a margin call? c. Show the investor's"T account at the share price of $40. (cales, here d. What is the actual margin at a share price of $40? e. Calculate the investor's return for the 125 day holding period

Answer 1

Value of investment= 400*50$= 20000$

Initial margin (50% of value)= 10000$

Minimum margin (30% of investment)= 6000$

a) Being the initial margin money transferred to broker account

Security Margin Account

Particulars	Debit amount	particulars	Credit amount
To cash	10,000

Broker account

Particulars	Debit amount	particulars	Credit amount

Cash Account/Bank account

Particulars	Debit amount	particulars	Credit amount
		by Security Margin	10000

b) Investor would receive a margin call when the price of the share increases by 10 $ or more i.e when the share price rise to 60$ or more he would receive a margin call.

c) Since the investor is short on shares and the price has fallen, he would have $ 4000 (10 $ *400 shares) added in his security margin account

Security Margin Account

Particulars	Debit amount	particulars	Credit amount
To cash	10,000
to P/L A/c	4000

Profit & loss A/c

Particulars	Debit amount	particulars	Credit amount
		by margin	4000

d) Actual Margin is 14000$/400 shares= 35$

e) Investors return= 4000/10000*125/365= 13.70%

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