You want to short 100 shares of LSU Technologies that are currently priced at $40 each and distribute no dividends. The initial margin is 50% and the maintenance margin is 30%.

1. Create the balance sheet of the position.

Assets                      Liabilities

Stock Value

Equity

2. Following a drop in rankings relatively to Tulane, the price of the stock decreases to $28. Estimate the return of your investment.

R =  =  = 60% 3.   Calculate the price that would initiate a margin call.

MM =  =  = 0.3 ⇒ 6, 000 − 100 · P = 30 · P ⇒ P =  = 46.15$

4. Suppose that you have to make a tuition payment of $1,500 in the near future, which you can’t miss. What kind of order should you submit (specify order type and price) to your broker, so you will have enough money to make this payment in the event that stock price increases?

To make your tuition payment, you can take a maximal loss of $500 (from your $2,000 invest- ment). Your equity drops at $1,500, when the value of the stocks increases to $4,500 or—-since you has shorted 100 shares—when the share value increases to 45$.  You have to submit a stop-buy order at $45 to buy back the shares you borrowed, if it crosses this threshold.

5. Suppose the price of the stock instantaneously increases to 60$.  Will you get a margin call? If yes, how much collateral (T-bills) would you be asked to contribute to keep your position open?

Anything above 46.15$ will initiate a margin call. At $60 per share the cost of replacing the shares will be 6,000$ and the equity will be completely wiped out. To maintain a margin of 30%, you have to contribute  = 0.3 ⇒ X = 1, 800$ in T-bills.