Question

Suppose you just bought the new Windoze 8 and that you realize that it really sucks. As a result you are sure that the price of Microsoft stock (currently trading for $36.4) is going to fall and you tell your broker to short 190 shares. *JUST NEED HELP ON 3*

1 If the broker's initial margin is 50%, what is the value of personal assets you must have in your account to meet the margin requirement?

0.5*190*$36.4=$3,458

2 Assume you have the value of personal assets determined in part 1 in your account. If the broker has a maintenance margin of 30%, what is the highest value the price of Microsoft stock can reach before you are issued a margin call? Total assets=$3,458+190*$36.4=$10,374 The price P that makes your margin reach the maintenance level is given by: (10,374-190P)/(190P)=0.3 Thus, P=10,374/((1+0.3)*190)=42

3 If the price of Microsoft stock falls to $20, what is the profit you make from the short sale? No decimals

Answer 1

Profit from the short sale=number of shares*(shorted price-final price)=190*(36.4-20)
=3116