You sell short 100 shares of Hi-Light Corporation when it is trading at $70. Your margin requirement is 50 percent. Assuming there was no commission and the maintenance margin is 25 percent, at what stock price would you receive a margin call?
A) $76
B) $80
C) $84
D) $88
E) $92

Question

Quizplus · Accepted Answer

To receive a margin call, the equity in the account must fall below the maintenance margin requirement. Initially, you sell short 100 shares at $70, receiving $7,000. The margin requirement is 50%, so you must have $3,500 in your account. The maintenance margin is 25%, so your equity must be at least 25% of the current market value of the shorted stock. If the stock price rises to $84, the market value of the shorted stock is $8,400. Your equity would be $7,000 (initial proceeds) - $8,400 (current market value) + $3,500 (initial margin) = $2,100. The required equity at $84 is 25% of $8,400, which is $2,100, triggering a margin call.

You Sell Short 100 Shares of Hi-Light Corporation When It