(a) Stock market around the world is affected by COVID-19 pandemic. As an experienced investor you decide to take the advantage of it. Currently the stock of ABC Ltd. Is selling for $40 per share, which was trading at $45 one week earlier and you are certain that the price will fall further. To take the advantage of this downward price momentum you sell short 1000 share of ABC Ltd at the current market price. You want to make $5000 profit from this short selling. You place an order with you broker to purchase the shares at a certain price to cover the position. What type of order did you place with your broker and at what price? Explain why.

(b) Continue from 2(a) above. You borrowed 1000 shares of ABC Ltd from your broker and sell short. Initial margin is 50%. Your broker informs you that a margin call will be issued if your equity falls below $13,500. How much can the price of ABC Ltd rise before you get a margin call? What is the maintenance margin in your account?

Answer rating: 100% (QA)

1 a Type of order that should be placed with the help of broker is limit order The order should be p... View the full answer