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Suppose that you sell short 500 shares of XTel, currently selling for $40 per share, and give your broker $15,000 to establish your margin account.
Suppose that you sell short 500 shares of XTel, currently selling for $40 per share, and give your broker $15,000 to establish your margin account.
- If you earn no interest on the funds in your margin account, what will be your rate of return after one year if XTel stock is selling at (i) $44; (ii) $40; (iii)$36? Assume that XTel pays no dividends.
- If the maintenance margin is 25%, how high can XTels price rise before you get a margin call?
- Redo parts (a) and (b), but now assume that XTel also has paid a year-end dividend of $1 per share. The prices in part (a) should be interpreted as ex-dividend, that is, prices after the dividend has been paid.
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