CFA Level IEquity InvestmentsHard
An investor sells short 100 shares of a stock at $40 per share. The initial margin requirement is 50%, and the maintenance margin requirement is 30%. At what stock price will the investor first receive a margin call?
- A$46.15
- B$48.00
- C$33.33
- D$37.33
Show answer & explanationAnswer & explanation
Correct answer: A. $46.15
For a short sale, the margin call price is P0 × (1 + initial margin)/(1 + maintenance margin) = 40 × 1.50/1.30 = $46.15. As the stock price rises, the investor's equity (relative to the growing value of shares owed) falls, eventually breaching the 30% maintenance requirement.
Why the other options are wrong
- B. This results from simply adding (IM-MM) to 1 and multiplying by price, an invalid shortcut.
- C. This results from applying (1-MM) incorrectly for a short position.
- D. This results from using the long-position formula instead of the short-position formula.
Short sale margin call price
The price at which a short seller's account equity falls to the maintenance margin level, triggering a margin call, calculated using P0 × (1+IM)/(1+MM).
- Short sellers face margin calls when price rises, not falls
- Formula: Pmc = P0 × (1+initial margin)/(1+maintenance margin)
- Proceeds from the short sale plus margin deposit form the initial equity base
Memory trick: For shorts, rising prices erode equity — flip the long formula's signs.