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 $30 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 $30 to $38.50, and the stock has paid a dividend of $2.40 per share. a. What is the remaining margin in the account? Remaining margin $ b-1. What is the margin on the short position? (Round your answer to 2 decimal places.) Short margin % b-2. If the maintenance margin requirement is 30%, will Old Economy receive a margin call? Yes No c. What is the rate of return on the investment? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) Rate of return %

Explanation / Answer

The initial margin: 0.50 x 1,000 x $30 = $15,000

The firm loses 30-38.5 = $8.5 per share, plus a payment of $2.4 dividend pay share, or a total loss of $6.1 per share or $6.1 x 1,000 = $6,100 of loss.

Remaining dollar margin: $15,000-$6,100 = $8,900

Margin Ratio: $8,900/(1,000 x $38.5) = 23.11%, This is lesser than 30% (Maintenance margin), so he will receive a margin call.

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