You sold short 100 shares of common stock at $75 per share. The initial margin is 50%. At what stock price would you receive a margin call if the maintenance margin is 30%?
Question
You sold short 100 shares of common stock at $75 per share. The initial margin is 50%. At what stock price would you receive a margin call if the maintenance margin is 30%?
Solution
To calculate the stock price at which you would receive a margin call, you need to use the formula for the Margin Call Price (MCP):
MCP = (Initial Price * (1 - Initial Margin)) / (1 - Maintenance Margin)
You sold short 100 shares at 75. The initial margin is 50% (or 0.50), and the maintenance margin is 30% (or 0.30).
Substituting these values into the formula:
MCP = ($75 * (1 - 0.50)) / (1 - 0.30)
MCP = ($75 * 0.50) / 0.70
MCP = $37.50 / 0.70
MCP = $53.57
So, you would receive a margin call if the stock price rises to $53.57.
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