Question

You are bearish on Telecom and decide to sell short 100 shares at the current market price of $30 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? (Round your answer to 2 decimal places.)

Answer 1

Answer:

initial margin = $1500

margin call will be issued when the stock price reaches at  $34.62

Explanation:

given data

sell = 100 shares

market price =  $30 per share

to find out

How much in cash put  brokerage account and How high price of stock go before get margin call

solution

we know here value of investment that is

value of investment = shares × market price

value of investment = 100 × 30

value of investment = $3000

and Initial Margin is = value of investment × margin requirement

Initial Margin is = 3000 × 50%

initial margin = $1500

and

Total Assets is = value of investment  + initial margin

Total Assets is = $3000  + $1500

Total Assets is = $4500

so

total liability = share × Share Price

total liability = 100 P

here P is Share Price

so

Net Worth = Total Assets - Total Liabilities

Net Worth = 4500 - 100 P

and

Maintenance Margin =  $\frac{Net worth}{Total Liabilities }$

30 % =  $\frac{4500 - 100 P}{100 P }$

0.30 × 100 P = 4,500 - 100 P  

P = 34.62

so margin call will be issued when the stock price reaches at  $34.62