You open a margin account and deposit $5,000. You sell short 1,000 shares XYZ st

Question

You open a margin account and deposit $5,000. You sell short 1,000 shares XYZ stock for $10 per share. The proceeds of the sale, $10,000, is deposited in your account for a total account value of $15,000. Scenario 1 - The stock price declines to $6 per share, so the 1,000 shares that you sold short is currently worth $6,000. What is your equity What is your margin percentage Now, this short sale would be profitable if you bought back the shares now to cover your short, for a net profit of $4,000 minus brokerage commissions and any dividends that had to be paid while the stock was borrowed. Scenario 2 - The stock price rises to $12.00 per share, which means it will cost you $12,000 to buy back the shares now.

Explanation / Answer

Answer (a) Margin Deposit 5000 Proceeds from short sale 1000*10 10000 Current value of short sale 1000*6 6000 4000 Equity 9000 Margin Percentage 9000/6000*100 150% Answer (b) Margin Deposit 5000 Proceeds from short sale 1000*10 10000 Current value of short sale 1000*12 12000          (2,000) Equity 3000 Margin Percentage 3000/12000*100 25% Answer (c) Margin is below 30% so margin Call will be make.

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