Question

You short-sell 286 shares of GE at a price of $4.00 per share using your full margin which as an initial margin requirement of 55% (or 0.55 ). Your maintenance margin is set at 45% (or 0.45 ). At what price per share will you get your margin call?

Answer 1

The price per share at which you will receive a margin call is $457.60.

Step-by-step explanation:

In order to calculate the price per share at which you will receive a margin call, we need to consider the initial margin requirement and the maintenance margin.

The initial margin requirement is 55% (or 0.55) and the maintenance margin is 45% (or 0.45). To calculate the price per share at which you will receive a margin call, we can use the following formula:

Margin Call Price = (Amount Borrowed + Transaction Costs) / (Shares Shorted × (1 - Maintenance Margin))

Let's substitute the given values into the formula: Margin Call Price = (286 × $4.00) / (1 - 0.45). Solving this equation, we get:

Margin Call Price = $457.60

Therefore, you will receive a margin call if the price per share of GE falls to $457.60.

Answer 2

The student's question involves using a mathematical formula to calculate the price per share at which a margin call will happen for a short-sold stock position on a margin account, considering the initial and maintenance margin requirements.

Step-by-step explanation:

The question involves calculating the price per share at which a margin call occurs after short selling shares of GE on margin. In a margin account, you can borrow money from your broker to purchase more stock than they normally could by using existing stock as collateral.

A margin call is a demand by the broker that the investor deposits additional money or securities to bring the margin account back to the minimum maintenance margin.

To calculate this, we use the formula for the maintenance margin call price for short selling, which is given by P = (P0 (1 - Initial Margin)) / (1 - Maintenance Margin), where P is the price at which the margin call will occur, P0 is the initial price at which the stock was short sold, and the Initial and Maintenance margins are given as percentages.