You short-sell 200 shares of Tommy co. now selling for $37 per share. If you wis

Question

You short-sell 200 shares of Tommy co. now selling for $37 per share. If you wish to limit your loss to $1,450, you should place a stop-buy order at what price?

You just bought 200 shares of a stock priced at $45 per share using 50% initial margin. The broker charges 5% annual interest rate on the margin loan and requires a 30% maintenance margin. One year later stock price dropped to 29 and you recieved margin call, to restore your margin to the initial margin level, how much would you need to deposit?

Explanation / Answer

Total loss = 1450

Increase in price = 1450/200 i.e 7.25

Stop buy order = 37+7.25 i.e 44.25

2) Total value = 200*45 i.e 9000

Initial Margin = 9000*50% i.e 4500

Interest Charged = 4500*5% i.e 22.50

Maintenance margin = 9000*30% i.e 2700

Decline in value = 200 ( 45-29)i.e 3200

Amount to be deposited = 3200+22.50 i.e 3222.50

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