Last week, you sold 800 shares of Ace stock for $24,000. The sale was a short sale with an initial margin requirement of 70%. The maintenance margin is 40%. Some positive news concerning the company was released last night and the stock price jumped this morning to $35 a share. What is your current margin position in this stock?

Question

Quizplus · Accepted Answer

Initially, you sold 800 shares for $24,000, so your selling price was $30 per share ($24,000 ÷ 800). With an initial margin requirement of 70%, you would have deposited $16,800 ($24,000 × 0.7) and borrowed $7,200 ($24,000 - $16,800). 
To calculate the maintenance margin, we can use the formula: 
Maintenance margin = (Market value of the stock - Loan balance) ÷ Market value of the stock 
At the current stock price of $35, the 800 shares are worth $28,000 ($35 × 800). 
Your loan balance would be the initial loan balance of $7,200 - the profit from the short sale, which is ($30 - $35) × 800 = -$4,000 (negative because the stock price went up). So, your loan balance is now $7,200 - (-$4,000) = $11,200. 
So your margin position is: 
(28,000 - 11,200) ÷ 28,000 = 0.6 = 60% 
Since this is lower than the maintenance margin of 40%, your margin position is now 45.71% [(28,000 - 11,200) ÷ 28,000] ÷ 0.4.

Last Week, You Sold 800 Shares of Ace Stock for $24,000