Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams at $125 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 $125 to $137.00, and the stock has paid a dividend of $21.00 per share.

a. What is the remaining margin in the account?

b-1. What is the margin on the short position? (Round your answer to 2 decimal places.)

b-2. If the maintenance margin requirement is 30%, will Old Economy receive a margin call?

Question

Business

Philip York

10 July, 22:30

Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams at $125 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 $125 to $137.00, and the stock has paid a dividend of $21.00 per share.

a. What is the remaining margin in the account?

b-1. What is the margin on the short position? (Round your answer to 2 decimal places.)

b-2. If the maintenance margin requirement is 30%, will Old Economy receive a margin call?

+3

Answers (1)

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Ignacio · Answer 1

a) Initial margin = $125 * 1000*0.5 = 125*500 = 62,500

137 - 125 = 12 increase

OET loses 12*1000 = $12,000

Also, dividends to be paid is 21*1000 = $21,000

So, margin account decreases to 62,500 - 12,000 - 21,000 = $29,500

b) Margin on short position = Equity/Value of shares owned = 29,500/137 / 1000 = 21.53%

c) Yes, it will receive the margin call