a. Construct the balance sheet if Dot Bomb goes up to $110.

b. If the short position maintenance margin in Example 3.4 is 40%, how far can the stock price rise before the investor gets a margin call?

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EXAMPLE 3.4 Margin Calls on Short Positions Suppose the broker has a maintenance margin of 30% on short sales. This means the equity in your account must be at least 30% of the value of your short position at all times. How much can the price of Dot Bomb stock rise before you get a margin call? Let P be the price of Dot Bomb stock. Then the value of the shares you must pay back is 1,000P, and the equity in your account is $150,000 1,000P. Your short position margin ratio is equity/value of stock = (150,000 1,000P)/1,000P. The critical value of P is thus 150,000 1,000P Equity Value of shares owed = 1,000P = .3 which implies that P = $115.38 per share. If Dot Bomb stock should rise above $115.38 per share, you will get a margin call, and you will either have to put up additional cash or cover your short position by buying shares to replace the ones borrowed.