Question

You short sell 20 shares of a stock which is currently traded for 100 dollars. The maintenance margin is 30%. Three days later, the stock price hits 130 dollars, and you immediately receive a margin call. What is the initial margin requirement

Answer 1

Based on the purchase price, the maintenance margin, and the margin call, the initial margin was 69%.

What is the initial margin?

This is the percentage of the purchase price that you have to pay before you can use the margin account to sell stock short.

It can be found as:

Margin call = Short sale price x [(1 + Initial margin)/ (1 + Maintenance margin)]

Solving gives:

130 = 100 x [ ( 1 + initial margin) / ( 1 + 30%)]

130 = (100 + (100 x initial margin)) / 1.3)

130 x 1.3 = 100 + 100 x initial margin

100 x initial margin = 169 - 100

Initial margin = 69/100

= 69%

In conclusion, it is 69%.

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