2324-3-7P

AID: 8873 | 02/09/2015

Short Sale and Margin

A short sale is a trading strategy that allows investors to get profit from reduced share
price. Investors borrow stocks of a company from their brokers and sell them. Later, the
short-seller (investor) must purchase a share of the same stocks to replace the shares that
have been borrowed. Here short-sellers have to replace the stocks and any dividend these
stocks have earned during the period.
a. When OET orders its brokers to sell 1000 shares of $40 each through short
selling, OET account is credited with $40,000. OET should also have a margin
requirement of 50% in its account. Margin is $20,000.

$40,000 $20,000 $60,000

Therefore, total initial assets in its account is
When share price rose to $50 each, OET should buy 1000 shares at $50 each to
replace its short position and it should also pay back $2 per share dividend on
1000 shares.

$50,000 (1000 $2) $52,000

Therefore total liability is
After
paying
off
his
$60,000 $52,000 $8,000

liability,

OETs

remaining

margin

is

b. OETs margin Ratio is as follows.

$8,000
M arg in Ratio
16%
$50,000
, which is less than required 30% margin.
Therefore, OET receives margin call.

Rate of return
c.

Re turn Initial own investment $8,000 $20,000

60%
initial own investment
$20,000