Lorenzo Bretscher Derivatives Spring 2022

1. The investment fund Rusty Bear enters a short position to sell 10,000 shares of Microsoft for
50$ per share. The initial margin is 80% of the initial stock price and the maintenance margin
is 70% of the current stock price. Rusty Bear trades by putting the minimum amount of cash
on the margin account to satisfy the initial requirement.

a) What is the maximum possible profit the position Rusty Bear can get at maturity? What
is the maximum possible loss? Suppose that if the price falls below 20$, Rusty Bear will
be squeezed out and be forced to liquidate its position. What are the maximum profit
and loss in this case?
b) What is the minimum security price pM that will lead to a margin call? Would you
receive a margin call if the price is greater than pM ? Would your answer to the last
question change in the case of a long position in the very same stock?
c) What is the value of pM if the initial amount of cash in the account would be 500,000$
instead?
d) On the first two weeks the price of the futures goes down by 10%, and Rusty Bear
interprets this as a bearish sign for Microsoft and is willing to strengthen its position.
The requirements to short a contract are now a 75% maintenance margin, and a 85%
initial margin. What is the minimum amount of cash Rusty Bear needs to add to its
account to short additional 5,000 shares?