Question

ART I Introduction 7. Old Economy Traders opened an account to short sell 1,000 shares of Internet Dreams from the previous problem. "The initial margin requirement was 50%. (The margin account pays no inter- est.) A year later, the price of Internet Dreams has risen from $40 to $50, and the stock has paid a dividend of $2 per share. a. What is the remaining margin in the account? If the maintenance margin requirement is 30%, will Old Economy receive a margin call? What is the rate of returm on the investment? c.

Answer 1

Initial price	40
No of shares	1,000
Total transaction value	40,000
Initial margin required %	50%
Initial margin required $	20,000
Maintainance margin required %	30%
Maintainance margin required $	12,000
Trade	short sale
After 1 year
Share price	50
Loss per share	10
Total loss ON 1000 shares	10,000
Remaining margin	10,000
Value of position	50,000
Maintainance margin required %	30%
Maintainance margin required $	15,000
Additional margin call	Yes
Additional margin amount	5,000
Cash flows	0	-40000
	1	5000	=-5000+10000
	IRR	-88%