Economy Traders opened an account to short -sell 1.000 shares of Into mot Dreams

Question

Economy Traders opened an account to short -sell 1.000 shares of Into mot Dreams at $45 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 $45 to $49.50. and the stock has paid a dividend of $5.40 per share. What is the remaining margin in the account? What is the margin on the short position? (Round your answer to 2 decimal places.) if the maintenance margin requirement is 30%. will Old Economy receive a margin call? Yes No 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.)

Explanation / Answer

a. Remaining Margin in the account

Let us first calculate the initial margin in the account

50% of 1000 shares @ 45 per share = 50% of 45000 = 22500.

Margin requirement after one year:

Remaining margin = 22,500 - 30,150 = - 7650

b.1 Margin on the short position

Initial margin = 22,500

Increased value of shares = 49,500

= 22,500/49,500 = 45%

b2. If maintaoinence margin is 30% , Old Economy will receive a margin call as price of the share has increased and also dividend is paid. So answer is Yes.

c. Rate of return on investment ,

No interest charged on margin , therefore

(Sale Price + Dividend- Purchase price - margin interest)/ Purchase price

=(49500+5400-45000-0)/45000= 22%

Share value 1000 49.5 49500 Margin 50% 24750 Dividend 1000 5.4 5400 New Margin 30150

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.