Problem
You believe the price of Freeze Frame Co. stock is going to fall, so you short 900 shares at a price of $45. The initial margin is 50 percent. Ignore dividends.
I. Construct the equity balance sheet for the original trade.
II. Construct equity balance sheets for a stock price of $40 per share.
III. What is your margin?
IV. What is your effective annual return if you cover your short position at this price in five months?
V. Construct equity balance sheets for a stock price of $50 per share.
VI. What is your margin?
VII. What is your effective annual return if you cover your short position at this price in five months?