An investor expects that the stock price of the ABC firm is overpriced and decide to sell short 700 stocks at $60 each. The investors deposited 50% margin as required.

a. What would be investor’s percentage margin if the stock price increases to $70 each.

b. If the maintenance margin is 25%, then to what extent the price would increase before the investor receive a margin call from the broker.

Given No of shares sell short=700 at 60$=700*60=42000$

Initial margin will be computed on the short position= 50% = 42000*50%=21000$

Given the price of the stock increased to 70$

So if the investors purchases then he will incur profit/(loss) per stock=(60-70)=-10$ per stock

a. the investors percentage margin if the stock price increases to 70$=

Loss per stock* no of stocks=-10*700=-7000$

So from investment of initial margin =21000$ he incurred loss of 7000$ so percentage margin=-7000/21000=-33.33%

b.  total exposure=42000$

so price at which the brokers calls for margin= P

He has to cover the inital marign and the exposure so total amount =

42000+42000*50%=63000

=maintainance margin=(63000-700P)/700P

=25%=(63000-700P)/700P

=175P=63000-700P

=875P=63000$=72$

So if the price of the share increases by (72-60) =12$ the brokers calls for margin.