your broker allowed you to short sell 400 shares of HGY corporation on January 1
ID: 2807602 • Letter: Y
Question
your broker allowed you to short sell 400 shares of HGY corporation on January 15th. the market price was $25. your initial margin was 60% and maintenance margin is 40%. on February 12th HGY stocks soared to $35/stock. would your broker ask you to deposit more money? how much? if the answer is yes, assume that you did come up with the extra money. now on April 16th the price of HGY fell to $21.50/stock. you decide to close your short position and your broker returned your money. how much you will get back? if you take your initial deposit plus any margin calls if issued and met, how much in percentage terms did you make from this short sale?
Explanation / Answer
Short sell 400 shares at $25 per share.
This means borrowing 400 shares from the broker and selling the shares in the market at $25 per share
Total sales price=400*25=$10,000
Initial margin=60%
Initial Margin requirement=0.60*10000=$6,000
Total amount available in margin account=short sale amount+ initial margin=10000+6000=$16,000
Maintenance margin=40%
February 12:
When stock price=$35 per share
Total share value=400*35=$14,000
Maintenance margin=0.4*14000=$5,600
Total margin requirement=14000+5600=$19,600
Margin Call =(19600-16000)=$3,600
Yes, the broker will ask to deposit money.
Amount of deposit required=$3,600
After the deposit,
Total amount available in margin account=$19,600
April 16:
Share price=$21.50
Price of 400 shares=21.5*400=$8,600
This amount will be utilized for purchase of 400 shares to be returned to the broker.
The balance will be returned.
Amount in the margin account=$19,600
Amount returned=(19600-8600)=$11,000
Amount invested=Initial deposit+ margin call=5600+3600=$9,200
Amount received after closing the short position=$11,000
Percentage Profit=((11000/9200)-1)*100 percent=19.5652%
Rounded to 19.57%
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