Question

You short sold 500 shares of Jasper stock at $41 a share at an initial margin of 60 percent. What is the highest the stock price can go before you receive a margin call if the maintenance margin is 40 percent?

Answer 1

Answer:

$Px = \frac{[(N*P) +(N*P*M1]/N}{1+ M2}$

And if we replace we have this:

$Px =\frac{[(500*41) +(500*41*0.6]/500}{1+ 0.4}$

$Px= 46.857 \ approx 46.86$

So then the highest the stock price can go before you receive a margin call if the maintenance margin is 40 percent is $ 46.86.

See explanation below.

Explanation:

For this case we define the following notation:

N= 500 represent the number of stocks for JAsper

P = 41 represent the stock price

M1 = 60% = 0.6 represent the initial margin

Px represent the highest stock price the variable of interest for this case

M2= 40% or 0.4 represent the mainteneance margin

We can find the value of Px with the following formula on this case:

$Px = \frac{[(N*P) +(N*P*M1]/N}{1+ M2}$

And if we replace we have this:

$Px =\frac{[(500*41) +(500*41*0.6]/500}{1+ 0.4}$

$Px= 46.857 \ approx 46.86$

So then the highest the stock price can go before you receive a margin call if the maintenance margin is 40 percent is $ 46.86.