Question

You are bearish on a technology stock and decide to sell short 100 shares at the current market price of $36.00 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

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?

Answer 1

a. Initial margin: $1,800 b. Stock price in case of 30% margin call: $41.53. a. Calculate the initial margin: Initial margin = Total market value of shares < Margin ratio = (Number of shares Market value per share) < Margin ratio = (100 $36) < 50% = $1,800 Thus, the initial margin is $1,800. b. Calculate the stock price in case of margin call of 30%: Total assets - Value of shares Required margin Value of shares 0.30 = Total assets - Value of shares Value of shares $5,400 - 100P 0.30 = 100P P= $41.53 Thus, the stock price in case of 30% margin call is $41.53. Calculate the total assets: Total assets Market value of shares + Initial margin = (Number of shares Market value per share) + Initial margin = (100 x $36) + $1,800 = $5,400 Please take your valuable time and rate the solution as per your convenience.