What is the investors initial equity

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Reference no: EM131836239

Let P be the price of a stock. The broker has an initial margin requirement of m0 , where 0 < m0 < 1 for shorting the stock. At this requirement, the investor is able to sell short Q units of this stock and does so.

A. Describe a short sale briefly in words.

B. What is the investors initial equity E as a function of m0 , P, and Q?

C. Now, the price of the stock changes to λP, λ > 0. What is the investor’s equity now?

Write your answer in terms of λ, m0, P and Q.

D. Find the new margin m' in terms of λ and m0 .

E. Discuss how the sign (positive, negative) of the new margin depends on λ and m0 .

F. Given a maintenance margin, c, what is the smallest λ, call it λ* such that, given an initial margin m0 , whenever price is greater than or equal to λ*P broker will issue a margin call on the short position.

Reference no: EM131836239

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