3.) Short Sale with Margin You open a brokerage account and plan to short 100 sh

Question

3.) Short Sale with Margin You open a brokerage account and plan to short 100 shares of Amazon (Ticker:AMZN) at $1,641.00/share. How much equity (cash) must you deposit in your account in order to execute this trade (assume a 50% initial margin requirement). A. If the required margin is 25% at what price will you receive a margin call? B. If AMZN's stock price falls to $1400 and you cover your short how much did you make on the trade in dollar terms and what was your rate of return on the trade?

Explanation / Answer

Total amount (cash) required to be deposited at the time of executing this trade:

Short Sale Value = 100 * $1,641 = $164,100

Initial margin req. = 50% of $164,100 = $82,050

Total Initial Cash required to execute this transaction = $164,100 + $41,025 = $246,150

From the above table it is clearly seen that the margin call will start till the price of the shares reaches $1970 and onwards.

B. If the stock price of Amazon falls to $1,400 from $1641, there is a profit of $1641-$1400 = $241 per share.

Since there are a total of 100 shares, the total profit on the entire transaction = $241* 100 = $24,100

Short Sale Value = $164100

Profit = $24100

Rate of return = $24100/$164100 * 100 = 14.69%

Shares Share Price Short Sale Value Initial Margin Requirement (50%) Total Initial Margin Required 100 1641 164100 82050 246150 Shares share price short sale value maintenance margin req. total margin requirement Margin Call 100 1641 164100 41025 205125 $0 100 1740 174000 43500 217500 $0 100 1841 184100 46025 230125 $0 100 1941 194100 48525 242625 $0 100 1970 197000 49250 246250 $100

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