Question

You are bearish on Telecom and decide to sell short 100 shares at the current market price of $36 per share. a. How much in cash or securities must you put into your brokerage account if the broker's initial margin requirement is 50% of the value of the short position? X Answer is complete but not entirely correct. Initial margin $ 5,000 b. How high can the price of the stock go before you get a margin call if the maintenance margin is 30% of the value of the short position? (Round your answer to 2 decimal places.) * Answer is complete but not entirely correct. Stock price reaches $ 57.69

Answer 1

Given for Stock Telecom,

Current market price = $36 per share

Shares short = 100 share

so. total portfolio value = 36*100 = $3600

a). Since initial margin = 50%, then own fund = 50% of portfolio value

So, own fund investment = 0.5*3600 = $1800

b). If maintenance margin = 30%

We know that maintenance margin = own fund/ portfolio value

Let value of stock at maintenance margin be X

Loss = 100X - 3600

Own fund = 1800 - (100X - 3600) = 5400 - 100X

Portfolio value = 3600 - (100X - 3600) = 7200 - 100X

So, 0.30 = (5400 - 100X)/(7200 - 100X) => X = $46.29