Assume an investor shorts 100 shares of Sandisk at $100 per share. The investor must have $5,000
Question:
Assume an investor shorts 100 shares of Sandisk at $100 per share. The investor must have $5,000 in the account (initial margin of 50 percent). The proceeds of the short sale are left in the account, making the total initial margin requirement $15,000 ($10,000 proceeds +$5,000 margin). If Sandisk rises to $110, the short sale value is now $11,000, and the maintenance margin is now 30 percent of that, or $3,300, for a total margin requirement of $14,300. Because the investor started with a total margin requirement of $15,000, no action is necessary. Now assume the price of Sandisk goes to $140. The short sale value is now $14,000, and the maintenance margin is now 30 percent of that, or $4,200. The total margin requirement is now $18,200, generating a margin call for an additional cash deposit of $3,200 (recall that the investor started with $15,000 after selling the stock short and putting up 50 percent of the value of the transaction as collateral).
Step by Step Answer:
Investments Analysis And Management
ISBN: 9781118975589
13th Edition
Authors: Charles P. Jones, Gerald R. Jensen