Question
Q2C. Suppose that the prime broker changes the margin requirements at t+1 (say next month) for both long and short positions to 30 %. You
Q2C. Suppose that the prime broker changes the margin requirements at t+1 (say next month) for both long and short positions to 30 %. You can assume that nothing else changed (i.e., the returns on long, short and cash positions are all zero). By how much would the positions need to be scaled back? Reproduce the balance sheet at t+1 and compute the margin ratios for long and short positions to ensure that they are at least 30 %.
Assets | t | t+1 | Equity and Liabilities | t | t+1 |
Long security positions | 160 | Equity supporting long positions | |||
Equity supporting short positions | |||||
Free equity | |||||
Total Equity (NAV) | 100 | 100 | |||
Initial margin for shorts | |||||
Cash proceeds from short sale | Margin loan on long positions | ||||
Cash in money market account | Short security positions | 200 | |||
Total Cash | Total Liabilities | ||||
Total A | Total E+L |
At t+1:
MS= Cash proceeds+Cash margin/(MV(Short equity)) -1 =?
ML= 1-(Margin loan)/(MVLong bought on margin) =?
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