Question: Suppose you are bearish on Stock Y and decide to sell short 100 shares at the current market price of $30 per share. You earn no interest on the funds in your margin account and the cost of borrowing shares is 0.25%.
1) How much cash or securities must you put into your brokerage account if the broker's initial margin requirement is 50%?
2) How high can the price of the stock go before you get a margin call if the maintenance margin is 30%?
3) Suppose that Firm Y pays a year-end dividend $1 per share. What will be your rate of return after 1 year if you close out your short position and the stock is selling at $25 ($35) per share?
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