Question

3. CL shares are selling at $71.40. An investor sells 1000 shares of CL short. The initial margin requirement is 35 percent, maintenance margin is 20%, and the commission is $4.95 per trade. After 180 days, the price goes down to $69.75 and the investor closes out the short position. While the investor is in the short position, CL pays $0.85 per share dividends. What is a. the annualized rate of return? b. the price at which there will be a margin call?

Answer 1

a) Total Sell value = 71.4*1000=71400

Initial Margin = 35%*71400=24990

Total Purchase value = 69.75*1000 = 69750

Profit = 71400-69750-4.95-4.95=1640.1

Holding period rate of return = 1640.1/24990 = 6.56%

Annualized rate of return = (1+6.56%)^2-1 =13.56%

b) Total Trade Value = 71400

Initial Margin = 24990

Maintenance Margin = 14280

Initial Margin - Maintenance Margin = 24990 -14280 = 10710

So if Value of trade increases by 10710, margin call will be received

Price = (71400+10710)/1000 = 82.11