search

Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams at \$80 per share

Homework

Rating

Showing Page:
1/3
Problem 3-16
Old Economy Traders opened an account to short-sell 1,000 shares of
Internet Dreams at \$80 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 \$80 to \$93.00, and the stock has paid a dividend of
\$12.00 per share.
a. What is the remaining margin in the account?
Remaining
margin
\$
b-
1.
What is the margin on the short position? (Round your answer to 2
decimal places.)
Short margin
%
b-
2.
If the maintenance margin requirement is 30%, will Old Economy
Yes
15,000
16.13

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
%
rev: 09_23_2013_QC_36097
Explanation:
a.
The initial margin was: \$80 × 1,000 × 0.50 = \$40,000.
As a result of the \$13.00 increase in the stock price, Old Economy Traders
loses: \$13.00 × 1,000 shares = \$13,000.
Moreover, Old Economy Traders must pay the dividend of \$2 per share to
the lender of the shares: \$12.00 × 1,000 shares = \$12,000.
The remaining margin in the investors account therefore decreases to:
\$40,000 – \$13,000 – \$12,000 = \$15,000.
b.
Margin on short position =
Equity
Value of shares owed
=
\$15,000/\$93.00 = .1613 =
16.13%
1,000 shares
Because the percentage margin falls below the maintenance level of 30%,
there will be a margin call.
c.
-62.50

The rate of return =
Ending equity – Initial equity
Initial equity
=
\$15,000 –
\$40,000 = –0.6250 = –62.50%
\$40,000

User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.
Review
Review

Anonymous
Just what I was looking for! Super helpful.

Studypool
4.7
Trustpilot
4.5
Sitejabber
4.4