Jennifer believes that Northern Wine stock is going to decline in value so she is short selling 1,000 shares at $22 a share. Her initial margin requirement is 70% and the maintenance margin is 30%. What is the highest the stock price can go before she receives a margin call?

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Quizplus · Accepted Answer

The highest stock price before a margin call can be calculated using the formula: $$P = \frac{P_0 \times (1 + IM)}{1 + MM}$$ where $P_0$ is the initial stock price, $IM$ is the initial margin requirement, and $MM$ is the maintenance margin. Substituting the given values: $$P = \frac{22 \times (1 + 0.70)}{1 + 0.30} = \frac{22 \times 1.70}{1.30} = \frac{37.4}{1.30} = 28.7692...$$ Rounded to two decimal places, the highest stock price before receiving a margin call is $28.77.

Jennifer Believes That Northern Wine Stock Is Going to Decline