Question

Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams at $105 per share. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from $105 to $110.00, and the stock has paid a dividend of $17.00 per share.
a. What is the remaining margin in the account?


Remaining margin $


b-1. What is the margin on the short position? (Round your answer to 2 decimal places.)


Short margin %


b-2. If the maintenance margin requirement is 30%, will Old Economy receive a margin call?

Yes
No


c.
What is the rate of return on the investment? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)



Rate of return %

Answer 1

Answer:

a. $30,500

b1. 27.73%

b2. Yes because the 30% margin requirement is higher than 27.73% actual

c. -41.90%

Explanation:

a. Margin requirement at the beginning = 1,000 x 105 x 50% = $52,500

Payoff gained/(lose) from the short-sell position = ( Delivery price in the position - Market price - Dividend per stock ) x 1,000 = ( 105 - 110 - 17) x 1,000 = (22,000)

=> Remaining margin = Initial margin + Payoff from the short-sell position = 52,500 - 22,000 = $30,500

b1. Margin on the short position = Remaining margin / Values of underlying stocks in the position = 30,500 / 110,000 = 27.73%

b2. As the traders is in short position and the actual price is higher than the exercised price in the option, the margin on the short position lower than requirement ( 27.73% < 30%) will trigger  a margin call.

c. Return on the investment equals to Pay-off from the position / initial margin requirement = -22,000 / 52,500 = 41.90%