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An investor short-sold 200 shares of XYZ Company at $70 per share. If the initial margin was 40% and the maintenance margin is 30%, what is the margin-call triggering price for the short position?

Question

An investor short-sold 200 shares of XYZ Company at $70 per share. If the initial margin was 40% and the maintenance margin is 30%, what is the margin-call triggering price for the short position?

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Solution

To calculate the margin-call triggering price for the short position, we need to follow these steps:

  1. Calculate the initial value of the short position: 200 shares * 70/share=70/share = 14,000.

  2. Calculate the initial margin requirement: 14,000∗4014,000 * 40% = 5,600. This is the amount the investor initially deposited.

  3. The margin call will be triggered when the equity in the account falls below the maintenance margin. The equity in the account is the initial deposit minus the current value of the short position.

  4. Set up the equation for the margin call: Equity = Initial deposit - Current value of short position = $5,600 - 200*P (where P is the price per share).

  5. Set the equity equal to the maintenance margin requirement: 5,600−200∗P=5,600 - 200*P = 14,000 * 30%.

  6. Solve the equation for P: 5,600−200∗P=5,600 - 200*P = 4,200.

  7. Rearrange the equation and solve for P: 200*P = 5,600−5,600 - 4,200 = $1,400.

  8. P = 1,400/200=1,400 / 200 = 7.

So, the margin-call triggering price for the short position is $7 per share.

This problem has been solved

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