Suppose that instead Einar short sells 200 shares of German Power Weak Inc. at $40 each. NASDUCK now sets a margin requirement of 30%. (e) How much cash does Einar need to invest? (f) Calculate the margin call of NASDUCK if the price increases to $44. (g) Suppose the price falls to $25. How much cash can Einar take out from his margin account? (h) Suppose he takes out 50% of the amount in part (g). At what price threshold will Einar face a margin call by NASDUCK?
Suppose that instead Einar short sells 200 shares of German Power Weak Inc. at $40 each. NASDUCK now sets a margin requirement of 30%. (e) How much cash does Einar need to invest? (f) Calculate the margin call of NASDUCK if the price increases to $44. (g) Suppose the price falls to $25. How much cash can Einar take out from his margin account? (h) Suppose he takes out 50% of the amount in part (g). At what price threshold will Einar face a margin call by NASDUCK?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Suppose that instead Einar short sells 200 shares of German Power Weak Inc. at $40 each. NASDUCK now sets a margin requirement of 30%.
(e) How much cash does Einar need to invest?
(f) Calculate the margin call of NASDUCK if theprice increases to $44.
(g) Suppose the price falls to $25. How much cash can Einar take out from his margin account?
(h) Suppose he takes out 50% of the amount in part (g). At what price threshold will Einar face a margin call by NASDUCK?
(e) How much cash does Einar need to invest?
(f) Calculate the margin call of NASDUCK if the
(g) Suppose the price falls to $25. How much cash can Einar take out from his margin account?
(h) Suppose he takes out 50% of the amount in part (g). At what price threshold will Einar face a margin call by NASDUCK?
Expert Solution
Step 1: Define key term:
Margin Requirement:
A margin requirement is the amount of cash or securities that an investor must deposit with a brokerage or clearinghouse to cover a portion of the potential losses from a financial transaction, such as a short sale. It acts as a collateral to ensure that the investor can meet their obligation. The margin requirement is expressed as a percentage of the total transaction value, and it varies depending on the type of investment and market conditions.
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