You are bearish on Telecom and decide to sell short 100 shares at the current ma

Question

You are bearish on Telecom and decide to sell short 100 shares at the current market price of $31 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?

Initial margin            $

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.)

Stock price reaches            $

Explanation / Answer

(a) Current Market Value of Stock = $ 31 and Number of Shares Shorted(Sold) = 100

Total Short Position Value = 100 x 31 = $ 3100

Initial Margin = 50% of Total Short Position = 3100 x 0.5 = $ 1550

Cash Deposited = $ 1550 and Securities = 100 shares of $ 31 each.

(b) Maintenance Margin = 30 % of Total Short Position =

The investor receives a margin call if the value of his/her equity breaches the maintenance margin level

Let the stock price be K

Equity Value = Margin Account Value - Short Position Value = (31 x 100 + 1550 - 100 x K) >= 30% of Current Short Position Value

4650 - 100 K = 30 x K

K = 4650 / 130 = $ 35.77 approximately.

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