You sell short 200 shares of Doggie Treats Inc. which are currently selling at $25 per share. You post the 50% margin required on the short sale. If your broker requires a 30% maintenance margin, at what share price will you get a margin call?
(You earn no interest on the funds in your margin account and the firm does not pay any dividends.)

Question

Quizplus · Accepted Answer

The correct answer is A.The maintenance margin is 30%, so the broker will issue a margin call if the equity in the account falls below 30% of the current market value of the shares. The current market value of the shares is $25 per share x 200 shares = $5,000. The equity in the account is the initial margin of $2,500 minus any losses on the short sale. The losses on the short sale are the difference between the current market price of the shares and the price at which they were sold short. If the share price rises to $28.85, the losses on the short sale will be $28.85 - $25 = $3.85 per share, or $3.85 x 200 shares = $770. The equity in the account will then be $2,500 - $770 = $1,730, which is less than 30% of the current market value of the shares. Therefore, the broker will issue a margin call at a share price of $28.85.

You Sell Short 200 Shares of Doggie Treats Inc