You short sold 500 shares of stock at a price of $42 and an initial margin of 65

Question

You short sold 500 shares of stock at a price of $42 and an initial margin of 65 percent. If the maintenance margin is 40 percent, at what share price will you receive a margin call? What is your account equity at this stock price? (Do not round intermediate calculations. Round Margin call price to 2 decimal places. Omit the "$" sign in your response.)

You short sold 500 shares of stock at a price of $42 and an initial margin of 65 percent. If the maintenance margin is 40 percent, at what share price will you receive a margin call? What is your account equity at this stock price? (Do not round intermediate calculations. Round Margin call price to 2 decimal places. Omit the "$" sign in your response.)

Explanation / Answer

Proceeds from short sale= No. of Shares *Stock Price of Share

= 500($42) = $21,000

Initial deposit = Proceeds from short sale * Intial Margin

= $21,000(.65) = $13,650

Account value =Proceeds from short sale+Initial deposit  

= $21,000 + 13,650 = $34,650

Margin call price = Account Value /[No. of Shares+(maintenance margin*No. of Shares)]

= $34,650 / [500 + (.40 × 500)] = $49.5

Account equity = Account Value - (No. of shares*Margin call price)

=$34,650 – (500 × $49.5) = $9,900

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