Suppose that you sell short 1000 shares of Intel, currently selling for $40 per

Question

Suppose that you sell short 1000 shares of Intel, currently selling for $40 per share, and give your broker $25,000 to establish your margin account. a. If you earn no interest on the funds in your margin account, what will be your rate of return after 1 year if Intel stock is selling at: (i) $46; (ii) $40; (iii) $34? Assume that Intel pays no dividends. (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Round your answers to 2 decimal places. Omit the "%" sign in your response.) (i) Rate of return -24 % (ii) Rate of return 0 % (iii) Rate of return 24 % b. If the maintenance margin is 25%, how high can Intel’s price rise before you get a margin call? (Round your answer to 2 decimal places. Omit the "$" sign in your response.) Margin call will be made at price $ or higher c. Redo parts (a) and (b), but now assume that Intel also has paid a year-end dividend of $2 per share. The prices in part (a) should be interpreted as ex-dividend, that is, prices after the dividend has been paid. (Negative values should be indicated by a minus sign. Round your answers to 2 decimal places. Omit the "%" & "$" signs in your response.) (i) Rate of return -32 % (ii) Rate of return -8 % (iii) Rate of return 16 % Margin call will be made at price $ or higher

Please help this is the sencond time posting this question.... I need MARGIN CALL WILL MADE AT PRICE $......

Explanation / Answer

As you have mentioned, I am answering the question pertaining to Margin Call.

Selling 1000 shares short for $40 per share, Total value = $40,000

Margin amount given = $25,000

Margin percentage = (25000 / 40000) = 0.625 = 62.5%

Maintainence margin = 25%

The price at which the investor will receive a margin call is calculated by the following formula:

Price * [(1+Initial Margin%) / (1+Maintainence Margin %)]

= 40 * [(1+0.625) / (1+0.25)]

= 40 * 1.3 = 52

so, the investor will receive a margin call at 52.00 with a maintainence margin of 25% and current price of $40.

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