Question

"An investor has sold short stock worth $45,000 in a margin account, depositing the margin requirement. If the market value of the stock falls to $30,000, what is the Selling Power in the account?"

Answer 1

Answer:

$45,000

Explanation:

Credits = $45,000

Short Market Value = $45,000

Equity % = Credits - Short Market Value

=> $45,000 - $45,000 = 0℅

Margin = $22,500 = 50%

Therefore, Total Credits = $45,000 + $22,500 = $67,500

If the market value falls to $30,000, the account will show:

Credits - Short Market Value = Equity %

$67,500 - $30,000 = $37,500 = 125% of short market value

However, in order to support a $30,000 stock position at 50% margin,

We have $30,000 / 2= $15,000.

Hence, given that the account has $37,500 of equity, the excess is:

$37,500 - $15,000 = $22,500 which may be borrowed and is the SMA amount.

Therefore, with $22,500 of SMA, double of the amount may be purchased or sold short in other marginable securities.

$22,500 * 2= $45,000.

The final answer is $45,000