Question
Oliver decides to short 100 shares of ALT Inc. stock when it is selling at its yearly high of $66. His broker tells him that
Oliver decides to short 100 shares of ALT Inc. stock when it is selling at its yearly high of $66. His broker tells him that the initial margin requirement is 40% and the maintenance margin is 30%.
1. Explain this leverage transaction and draw the assets/liabilities table when Oliver opens the margin account.
2. Ignoring interest expenses, at what stock price will Oliver get a margin call?
3. Suppose that the share price increases to the value computed in part 2.
3.1. Explain and show how Oliver would reinstate the margin account to the initial margin level (use one method). Draw the assets-liabilities table in this case.
3.2. If Oliver decides to close his position and take the loss, what percentage loss would Oliver take if this bad scenario occurred?
4. Instead of going up, the stock price actually goes down to $50 per share over a one-year holding period. Calculate the actual margin. What percentage return did Oliver make?
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