Question

Suppose you are a hedge fund manager. you only have two positions: cash position that is worth $5 billion. short position that is worth $15 billion. your broker requires a 125% margin on your short position. on the next day, your short position moves against you by going up by 50%. how much external cash outside your fund must you supply to avoid a margin call?

a. $7.5 billion
b. $10.125 billion
c. $6.725 billion
d. $8.125 billion

Answer 1

To avoid a margin call, the hedge fund manager must supply an additional $8.125 billion in external cash after the value of the short position rises by 50%, considering the broker's 125% margin requirement.

Step-by-step explanation:

The hedge fund manager has a $5 billion cash position and a $15 billion short position. The broker requires a 125% margin on the short position. After the short position increases in value by 50%, it's now worth $22.5 billion. The required margin becomes 125% of that value, which results in $28.125 billion. To find out how much external cash is needed to avoid a margin call, we subtract the initial value of the short position pre-increase ($15 billion) from the new margin requirement ($28.125 billion). The calculation is $28.125 billion - $15 billion, which equals $13.125 billion. However, the fund already holds $5 billion in cash, so the external cash needed is $13.125 billion - $5 billion, resulting in $8.125 billion that must be supplied to avoid a margin call.