Reference no: EM132588829

Question - Mr. Hassan orders his broker to short-sell 1000 shares of IBM when the stock price is $50 per share. The initial margin requirement is 40%. Maintenance margin is 25%.

a. Mr. Hassan only wants enough in the account to satisfy the initial margin requirement. How much should he put into his account first?

b. At what price would Mr. Hassan receive a margin call?

c. What would his profit be if he cleared his positions when the stock price dropped to $40 and IBM had paid $5 dividends per share in the mean time? What would the return on his investment be?

d. Now, ignore information in part c) (i.e., assume that Mr. Hassan did not clear his position at $40 and that IBM paid no dividends). In addition to short-selling shares of IBM at $50 per share, Mr. Hassan also put a stop-buy order with his broker for 500 shares at $55 (Remember, he had shorted 1000 shares). What would Mr. Hassan's total loss be if the stock price gradually climbed from $50 to $60 and he then closed out all remaining positions? What would the return on his investment be? (Assume no dividends were paid)