Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dre

Question

Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams at $40 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 $40 to $50, and the stock has paid a dividend of $2 per share.

a. What is the remaining margin in the account?

Remaining margin            $

b-1. What is the margin on the short position?

Short margin             %

b-2. If the maintenance margin requirement is 30%, will Old Economy receive a margin call?

c. What is the rate of return on the investment? (Negative value should be indicated by a minus sign.)

Rate of return             %

Explanation / Answer

a) 1000 shares*$40 per share = 40000

margin requirement is 50% so equity = 20000

1 year later price increase to 50

$1000 shares*$50 per share = 50000

dividend = $2*1000 = 2000

margin = 20000/52000 = 38%

b)No because the margin is above the requirement at 38%.

C)Price of 1000 stock year 1 at 50$/share = 50000

40000 – 50000 = -10000

Rate of return = (-10000 -20000)/20000=-150%

Thanks

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