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Brokerage requires a maintenance margin

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Question 1: The stock of ABC Inc is trading at $50. You short sold 350 shares of ABC at this price. However, price increased to $55, at which point you decided to close the trade. What was your percentage return? The initial margin rate is 75%.

Question 2: Consider the short sale trade in the previous question. If your brokerage requires a maintenance margin of 40%, at what price will you get a margin call? The initial margin rate is 75%.

Question 3: You find that in a normal year, the S&P500 index gives a return of 12%. However, you think that there is a 40% probability of the economy going into recession next year. If that happens, you predict that the index return will be 2%. What is the expected return on the S&P500 next year?

Reference no: EM132382520

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