Question

Old Economy Traders opened an account to short sell 2,500 shares of Internet Dreams at $70 per share. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from $70 to $80, and the stock has paid a dividend of $3.50 per share.

a. What is the remaining margin in the account? (Round your answer to the nearest whole number.)

b. If the maintenance margin requirement is 30%, will Old Economy receive a margin call? No Yes

c. What is the rate of return on the investment? (Round your answer to 2 decimal places. Negative value should be indicated by a minus sign.)

Answer 1

The initial ial margin - 21500 x 70 x 50•l. = 87,500 due to Loss et Increase in stock Price = 10x 2500 shares = 25000 Dividend to be paid to the lender = 3.5x2500 = 8750 The remaining margin in the investors account = 87,500 - 25000 – 8750 - 153,750 | 6) margin on short position : Equity Value of Shares owned 53,750 80 y 2500 - = 0.26875 = 26.875.4. 26.88./.? Because the %. Margin falls below the maintainence margin level of 30%, there will be a margin Call. . (c) Rate of Retron - 53,750 – 87500 calories |- 38.57.14% 87,500