You sell 500 shares of Delta Airlines Inc. (DAL) short at a price of $50 per sha

Question

You sell 500 shares of Delta Airlines Inc. (DAL) short at a price of $50 per share. a. How much is your initial margin given margin requirements of 40%? b. If the stock declines to $40 per share what is your percentage gain or loss on the initial equity? How about a price increase to $55? c. After a price decline to $30, you would like to take out some cash. How much cash can you take out while maintaining the required 40% margin? d. Assuming a 30% maintenance margin, at what price will you get a margin call, and how much cash would you need to put up?

Explanation / Answer

Total Amount = 500*50 = 25000

Margin requirement is 40% so it is 40% * 25000 = 10000

Answer b will be 40*500-50*500/10000 = -50%

if price rises to 55, then 55*500-50*500/10000 = 25%

Answer c if price decline to $30, then amount will be 30*500 = 15000

Margin requirement will be 40% * 15000 = 6000

so we will be able to take out $4000

Answer D, We have deposited 10000$ as margin, now the margin requirement falls to 30% then we will,

30% of x = 10000 so x = 33333.33 Now amount of shares are 500 so price at which we will get a margin call will be 66.66

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