Answer to Question #163161 in Economics for Tila Masinge

Question

An investor is bearish on a stock whose market price is $100 per share. He instructs his broker to sell short 1000 shares who borrows the 1000 either from another customer’s account or from another broker. Suppose the broker has a 50% margin requirement on short sales, how would the investor’s account look like? Supposing the share price drops to $70, how would the account look like? Supposing the broker has a maintenance margin of 30% on short sales, how much can the share stock rise before you get a margin call? 

Answer 1

$$p=100$$

$$q=1000$$

$$0.5\times100\times1000=50,000$$

$$0.5\times70\times1000=35,000$$

$$0.3\times70=21$$