I came across a question in the CFA institute book, and I answered it wrong. So, I came here asking for help!
Can you please provide any case or question on this situation.
Caroline Rogers believes the price of Gamma Corp. stock will go down in the near future. She has decided to sell short 200 shares of Gamma Corp. at the current market price of €47. The initial margin requirement is 40 percent. Which of the following is an appropriate statement regarding the margin requirement that Rogers is subject to on this short sale?
A. She will need to contribute €3,760 as margin.
B. She will need to contribute €5,640 as margin.
C. She will only need to leave the proceeds from the short sale as deposit and does not need to contribute any additional funds.
This question. I marked the answer as C. Apparently it is A. So, I was wondering how exactly this works…
Caroline Rogers believes the price of Gamma Corp. stock will go down in the near future. She has decided to sell short 200 shares of Gamma Corp. at the current market price of €47. The initial margin requirement is 40 percent. Which of the following is an appropriate statement regarding the margin requirement that Rogers is subject to on this short sale?
A. She will need to contribute €3,760 as margin.
B. She will need to contribute €5,640 as margin.
C. She will only need to leave the proceeds from the short sale as deposit and does not need to contribute any additional funds.
This question. I marked the answer as C. Apparently it is A. So, I was wondering how exactly this works…
the initial margin requirement is the amount of mimimum equity that you need to provide, so in this case it would be 200 * €47 = €9400 multiplied by the initial margin requirement i.e 40%. The remaining amount i.e €5640 shall be borrowed making this a leverage transaction.