Homework Answers
a. Total selling price = 100 x $50 = $5,000
Amount borrowed = (1 - 60%) x $5,000 = $2,000
When the stock price is $60,
MM = (100 * 60 - 2000)/(100 * 60) = 4000/6000 = 0.66 or 66.67%
b. The maximum potential loss for a short seller is unlimited, as there is no upper cap to the rise in stock price. For example, the short seller selling a stock at $60 may have to buy it back at $1000 and return it.
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