You sold short 400 shares of a stock for $60 per share. Your broker’s initial margin requirement is 60%. The broker’s maintenance margin requirement is 35%. You initially want to put up as little capital (money) as possible to support the short sale.
A.) How much capital must you have in your account before you can make the short sale?
B.) If the stock price goes to $70 per share, will you receive a margin call? Show your work to support your answer.
C.) If one year later you covered your short position at $52 per share, what rate of return will you receive on your investment if the company’s stock that you shorted paid total dividends of $0.50 per share during the time you held the stock short? Assume there are no broker transaction charges.

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batolisis batolisis · Answer 1 · 2020-10-12T15:50:24+02:00

Answer:

A) $14400

B) No margin call will be received because the balance in the margin account is > balance required in the maintenance margin account

C) 23.61%

Explanation:

A) capital that you must have

number of shares short * per share value * margin requirement

= 400 * 60 * 60% = 14400

B) If the share goes up to $70 per share

No margin call will be received because the balance in the margin account is > balance required in the maintenance margin account

First we have to calculate the balance in the margin account

= 14400 - 400*( change in share price)

= 14400 - 400 ( $10 ) = 10400

next we calculate the amount that is supposed to be in the maintenance margin account

= 400 * 70 * 35% = 9800

C ) calculate rate of return

first we calculate the gain on covering = number of shares * ( change in price par share)

= 400 * ( 60 - 52 ) = 3200

next we calculate total dividend received

= $0.5 * 400 = 200

Total gain = 3200 + 200 = $3400

Hence the rate of return

=( total gain / capital )* 100

= ( 3400 / 14400 ) * 100

= 23.61%