You Short Sold 350 Shares Of Stock At $32 And An I
You Short Sold 350 Shares Of Stock At A Price Of 32 And An Initial Ma
You short sold 350 shares of stock at a price of $32 and an initial margin of 60 percent. If the maintenance margin is 30 percent, determine the share price at which you will receive a margin call. Additionally, calculate your account equity at this stock price.
Paper For Above instruction
The problem involves a short sale transaction where an investor sells borrowed shares in anticipation of a decline in the stock's price. Initially, the investor shorts 350 shares at $32 per share, with an initial margin requirement of 60%. The maintenance margin requirement is 30%. The key objectives are to identify the stock price at which a margin call occurs and to compute the investor's equity at that price.
Initial Details:
- Number of shares shorted: 350
- Short sale price: $32
- Total proceeds from short sale: 350 * $32 = $11,200
- Initial margin requirement: 60%
- Initial margin deposit: 60% of $11,200 = 0.60 * $11,200 = $6,720
- Total value of the account initially: $11,200 (proceeds) + $6,720 (equity) = $17,920
Initial Margin Account Composition:
- The short sale proceeds are deposited and invested in the margin account.
- The investor deposits an initial margin of $6,720.
- The total account value at initiation: $17,920
Understanding Margin Call Conditions:
A margin call occurs when the equity in the account falls below the maintenance margin requirement. The equity in a short sale is calculated as:
\[ \text{Equity} = \text{Proceeds from short sale} - \text{Market value of borrowed shares} \]
When the share price rises, the market value of the shorted shares increases, and the equity decreases.
The maintenance margin condition is:
\[ \frac{\text{Equity}}{\text{Market value of short position}} \geq 30\% \]
Expressed mathematically:
\[ \frac{\,\text{Proceeds} - P_{s} \times \text{Number of shares}\,}{\,P_{s} \times \text{Number of shares}\,} \geq 0.30 \]
Where:
- \( P_{s} \) is the stock price at which the margin call occurs.
Plugging in the values:
\[ \frac{11,200 - P_{s} \times 350}{P_{s} \times 350} \geq 0.30 \]
Simplify numerator and denominator:
\[ \frac{11,200 - 350 P_{s}}{350 P_{s}} \geq 0.30 \]
Multiply both sides by \( 350 P_{s} \):
\[ 11,200 - 350 P_{s} \geq 0.30 \times 350 P_{s} \]
\[ 11,200 - 350 P_{s} \geq 105 P_{s} \]
Bring all terms to one side:
\[ 11,200 \geq 105 P_{s} + 350 P_{s} \]
\[ 11,200 \geq 455 P_{s} \]
Solve for \( P_{s} \):
\[ P_{s} \leq \frac{11,200}{455} \approx 24.64 \]
Since a margin call occurs when the stock price rises to a point where the margin is exactly at the maintenance margin, the stock price at margin call:
Margin Call Price = 24.64
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Account Equity at the Margin Call Price:
Calculate the equity at \( P_{s} = 24.64 \):
\[ \text{Equity} = 11,200 - 350 \times 24.64 = 11,200 - 8,624 = 2,576 \]
Thus, the account equity at this price is $2,576.
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Summary
- Margin call price: 24.64
- Account equity at margin call: 2,576
These figures illustrate the points at which the investor must take action to restore margin requirements or close out the position to avoid further losses.
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