Question 2: Short Selling Assume that you sell short 100 shares of Smart, Inc.,
ID: 2739321 • Letter: Q
Question
Question 2: Short Selling
Assume that you sell short 100 shares of Smart, Inc., at $50 per share at a time when the initial margin requirement is 50% and the maintenance margin on short sales is 30%. Use what you know about short selling to complete the “blanks” in the following table:
Item
A
B
C
Price per share
50
30
70
Proceeds from initial short sale
5000
n/a
n/a
Initial margin deposit
2500
n/a
n/a
Total deposit with broker
7500
7500
Current cost of buying back stock
5000
3000
Account equity
2500
4500
500
Actual margin
0.5
1.5
Maintenance margin position
OK
OK
Item
A
B
C
Price per share
50
30
70
Proceeds from initial short sale
5000
n/a
n/a
Initial margin deposit
2500
n/a
n/a
Total deposit with broker
7500
7500
Current cost of buying back stock
5000
3000
Account equity
2500
4500
500
Actual margin
0.5
1.5
Maintenance margin position
OK
OK
Explanation / Answer
Item A B C Price per share 50 30 70 Proceeds from inital short sale 5000 n/a n/a Initial margin deposit 2500 n/a n/a Total deposit with broker 7500 7500 7500 Current cost of buying back stock 5000 3000 7000 Account equity 2500 4500 500 Actual margin 0.5 1.5 0.071 Maintenance margin position OK OK NOT OK
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