Problem 3-10 You are bearish on Telecom and decide to sell short 160 shares at t

Question

Problem 3-10 You are bearish on Telecom and decide to sell short 160 shares at the current market price of $65 per share. a. How much in cash or securities must you put into your brokerage account if the broker's initial margin requirement is 50% of the value of the short position? (Round your answer to the nearest whole number.) Cash or secuities to be put into brokerage accountS 5,200 b. How high can the price of the stock go before you get a margin call if the maintenance margin is 30% of the value of the short position? (Round your answer to 2 decimal places Margin call will be made at price

Explanation / Answer

Answer a Calculation of initial margin requirement Initial margin = 50% of value of short position Initial margin requirement = 50% x [160 shares * $65 per share] = $5,200 Answer b Maintenance margin requirement = 30% of value of short position Maintenance margin requirement = 30% x [160 shares * $65 per share] = $3,120 Margin will be made at a price = Current market price per share + [Maintenance margin / no.of short shares] Margin will be made at a price = $65 + [$3120 / 160 shares] = $84.50 or higher

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