Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams from the previous question. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from $40 to $50, and the stock has paid a dividend of $2 per share.

a. What is the remaining margin in the account?

b. If the maintenance margin requirement is 30%, will Old Economy receive a margin call?

Question

Frida

Business

21 December, 00:29

Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams from the previous question. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from $40 to $50, and the stock has paid a dividend of $2 per share.

a. What is the remaining margin in the account?

b. If the maintenance margin requirement is 30%, will Old Economy receive a margin call?

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Answers (1)

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Ricardo Cervantes · Answer 1

a) Remaining margin in the account = (1000*40 * 0.5) - [ (50-40) * 1000] - (1000*2) = $8000

b) Margin rate = equity / liability = 8000/50000=0.16 = 16%

Old Economy Traders will receive a margin call