Trader A (the stock borrower) must leave cash collateral with Lender B of 102% of the market value of the borrowed shares (settled daily at closing price).

• Under Reg T, Trader A has to post an additional 50% in the margin account (based on the daily closing price).
• After the short position is taken, the brokerage house marks it to market. If the price has moved above the original value, the short seller is required by the brokerage house to put up more collateral. When 50% requirement (of Point 2) is not met, Reg T margin calls are issued (and must be paid in seven days).
• Trader A receives a rebate (interest payment) from Lender B on the cash collateral (the 102% part).

Imagine you short 250 shares of stock ABC at $130 and own a stock portfolio worth $1,000 on top of this. In all the questions, assume that the fee is 0%.

 

Question 1

What is the total amount of extra collateral that you have to deposit with the broker? How much of it should be in cash? 

Question 2

When the stock price drops to $120, what is the amount of equity that you have in the account? If you buy to cover, how much have you made?

Question 3

Suppose instead that the stock price rises to $150; what is the amount of equity that you still have? If you buy to cover, how much have you made?

Answer rating: 100% (QA)

1 From the given scenario Cash Collateral with Lender B 33150 102 of borrowed shares Reg T Requireme... View the full answer