Question

The stock of Flop Industries is trading at "$37" You feel the stock price will decline, so you short 400 shares at an initial margin of 60 percent. If the maintenance margin is 30 percent, at what share price will you receive a margin call?

Answer 1

Answer:

$45.54

Explanation:

Given that,

Stock of Flop Industries is trading at $37

Initial margin = 60 percent (short 400 shares sale)

Maintenance margin = 30 percent

Amount received from short sale:

= shares short × Stock trading price

= 400 × $37

= $14,800

Initial deposit:

=  Amount received from short sale × Initial margin

= $14,800 × 60%

= $8,880

Account value = Amount received from short sale + Initial deposit

                        =  $14,800 + $8,880

                        = $23,680

Margin call price:

= Account value ÷ [short sale + (short shares sale × maintenance margin)]

= $23,680 ÷ [400 + (400 × 30%)]

= $23,680 ÷ (400 + 120)

= $23,680 ÷ 520

= $45.54