Question

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 interest.) 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

Answer 1

Answer:

a.38%

b. No because the margin is above the requirement at 38%

c.-150%

Explanation:

a.

1000 shares*$40 per share = 40000

margin requirement is 50% so equity = 20000

1 year later price increase to 50

$1000 shares*$50 per share = 50000

dividend = $2*1000 = 2000

margin = 20000/52000 = 38%

b.

No because the margin is above the requirement at 38%

c.

Price of 1000 stock year 1 at 50$/share = 50000

40000 – 50000 = -10000

Rate of return = (-10000 -20000)/20000 = -150%