Chapter_3_DocCam - loan 1 Chapter 3 Example on Short Sale...

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Chapter 3 General Example of Margin Account Example on Buying on Margin Suppose you purchased 100 Citigroup (C) shares at $29.44 a share at the end of 2007 using $1,500 of your own funds and borrowing the remainder from your broker. a) What was your initial margin? b) If your maintenance margin was 30%, how far could C fall before you would get a margin call? c) How much money would you have to put into your account in order to satisfy the maintenance margin requirement if C suddenly dropped to $15 a share? d) C was trading at $6.71 a share at the end of 2008 and paid a dividend of $1.12 a share during 2008. What was the annual return of this investment if your broker was charging 5% annual interest for the loan?
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Unformatted text preview: loan? 1 Chapter 3 Example on Short Sale Suppose you borrowed 100 Citigroup (C) shares from your broker and sold them for $29.44 a share at the end of 2007. Your broker requires 50% initial margin in short sales, which you covered using the T-bills in your account. C paid a dividend of $1.12 a share during 2008. a) What was your profit if you covered your short position at the end of 2008 when C was trading at $6.71 a share? b) If your broker had a 30% maintenance margin requirement, how far could C rise before you would get a margin call? c) How much money would you have to put into your account in order to satisfy the maintenance margin requirement if C suddenly jumped to $40 a share? 2...
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