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Short Sale

Suppose you are bearish on Stock Y and decide to sell short 100 shares at the current market price of $30 per share. You earn no interest on the funds in your margin account and the cost of borrowing shares is 0.25%.

a) How much cash or securities must you put into your brokerage account if the broker's initial margin requirement is 50%?

b) How high can the price of the stock go before you get a margin call if the maintenance margin is 30%?

c) Suppose that Firm Y pays a year-end dividend $1 per share. What will be your rate of return after 1 year if you close out your short position and the stock is selling at $25 ($35) per share?

Can you help me get started with this assignment?

Solution Preview

** The answers are in the attached Excel file **

Suppose you are bearish on Stock Y and decide to sell short 100 shares at the current market price of $30 per share. You earn no interest on the funds in your margin account and the cost of borrowing shares is 0.25%.

Data
Share price= $30.00
Number of shares shorted= 100
Cost of borrowing shares = 0.25%
Time= 1 year
Initial Margin= 50%
Margin call at = 30%

a) How much cash or securities must you put into your brokerage account if the broker's initial margin requirement is 50%?

"Actual margin ={(Short Sales Proceeds + Initial Margin) - Stock owed} / Stock owed
"

At commencement:
Sales proceeds= $3,000 =100 x $30.
Margin ...

Solution Summary

Calculates the amount to be kept in the brokerage amount, the change in stock price before there is a margin call and the rate of return on a short sale of stock.

$2.19