Question

You are bearish on Telecom and decide to sell short 100 shares at the current market price of $49 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? Initial margin 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.) Stock price reaches

Answer 1

Part a:
Initial margin =50% of the total equity value
=50%*(100*49)=2450
Total value of the account=Stock value+Initial margin
=100*49+2450=7350

Answer: Initial margin=$7350

Part b:
Maintenance margin=[(Total value of the account)-(Stock value)]/(Stock value)
Suppose the margin call price be P, then we will have;

30%=[(7350)-(100*P)]/(100*P)
30%*(100*P)=(7350)-(100*P)
30%*(100*P)+(100*P)=(7350)
(30*P)+(100*P)=7350
130*P=7350
P=7350/130=56.53846 or $56.54 (Rounded to two decimal places)

Answer: Stock price reaches $56.54