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Suppose Miracle Hedge Fund (MHF) buys 50 shares of Phantastic Corp. at $10 each. Its brokerage firm Super Broke Brothers Inc. (SBB) sets a margin
Suppose Miracle Hedge Fund (MHF) buys 50 shares of Phantastic Corp. at $10 each. Its brokerage firm Super Broke Brothers Inc. (SBB) sets a margin requirement of 20% and charges an interest rate of r = 6% on the loan for purchasing the shares. How much cash does MHF need to invest? Calculate the margin call of SBB if the price falls to $8. What is the return for MHF on the transaction after the price decline? How is the return on cash influenced by a change in the interest rate r? Does your answer depend on the size of the margin requirement? Suppose that instead MHF short sells 20 shares of Awful Inc. at $20 each. Again, SBB now sets a margin requirement of 30% How much cash does MHF need to invest? Calculate the margin call of SBB if the price increases to $25
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