Answer:
Consider the following calculation
Step-by-step explanation:
Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams at $105 per share. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from $105 to $110.00, and the stock has paid a dividend of $17.00 per share.
a. What is the remaining margin in the account?
P0 = $ 105; P1 = 110; N = 1,000; Dividend per share , D = 17
Initial margin required = 50% x N x P0 = 50% x 1,000 x 105 = $ 52,500
Remaining margin = Initial margin + Payoff from the short position
Payoff from the short position = (P0 - P1 - D) x N = (105 - 110 - 17) x 1,000 = - $ 22,000
Hence, Remaining margin = $ 52,500 - $ 22,000 = $ 30,500
Please enter 30,500 as your answer in the answer box.
b-1. What is the margin on the short position? (Round your answer to 2 decimal places.)
Short margin = Remaining margin / Value of short shares today = $ 30,500 / (N x P1) = 30,5000 / (1,000 x 110) = 27.73%
Please enter 27.73 as your answer in the answer box.
b-2. If the maintenance margin requirement is 30%, will Old Economy receive a margin call?
Short margin = 27.73% < margin requirement of 30%, Hence, there will be a margin call.
Please choose "Yes" as your answer.
c. What is the rate of return on the investment? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)
Rate of return = Payoff from short position / Initial margin = -22,000 / 52,500 = - 41.90%
Hence, please enter -41.90 as your answer in the answer box.