Question

IN CLASS ASSIGNMENT Suppose You short sell 500 shares of ABC stock at $25/share Initial margin requirement is 50% and maintenance margin requirement is 40% A year later, stock price increases to $30/share QI. Initially, how much did you supply and how much did you borrow? Create an initial Balance sheet for short sale margin account. Q2. After a year later, what is your new margin? Did you get a margin call? Create a new B/S for this question Q3. What is the EAR on your investment if you cover your position at this price ($30)? Q4.What price per share would lead to a margin call?

Answer 1

Short sell Price 500 shares 25 per share Initial Margin requirement Maintenance Margin require 50% 40% Assets Liabilities Proceeds from sale (500 @ 25 ) Initial Margin 12500 Short position 6250 Account equity 12500 6250 Total 18750 Total 18750

After a year the price is 30$, there is a loss of 5$ per share total loss 500*5 = 2500 The value of Intial margin deposited would reduce to = 6250 -2500 = 3750 yes we will receive the margin call because the margin call price is 18750/((500+500*0.4)) 26.79 Assets Liabilities Proceeds from sale (500 @ 25 ) Initial Margin New margin added 12500 short position 3750 Account equity 2500 12500 6250 Total 18750 Total 18750

3) If you cover your position at 30 then you have $5 per share loss Total loss 5*500 = 2500 Total equity Investment = 6250 EAR = 2500/6250 *100 You have a loss of 40% of your capital on annual basis.

4) Margin Call price in case of short sell Initial price *( 1+ Initial Margin)/(1+ Maintenance margin) 25*(1+0.5)/(1+0.4) 26.79