Financial Markets and Products, Chapter 5, EOC 5.17

[AUola2165]

Question topic 5, EOC 5.17: A trader shorts 100 shares when the price is USD 50. The initial margin and maintenance margin are 150% and 125%. What is the initial margin required? How high can the share price go before further margin is required? (Ignore interest payments

answer: The trader is initially required to contribute USD 2,500 in addition to the USD 5,000 obtained from selling the shares, creating a margin balance of USD 7,500. If the USD share price rises to X, the maintenance margin becomes 100 * 1.25X = 125X. This is greater than the 7,500 margin balance when X 7 7,500/125, that is, when X 7 60.

I am a bit confused by this answer. If the maintenance margin is breached when the share price is 60, at that point the position's value is -500USD. The trader posted an initial margin of 2500USD. Basically, there is still 6,500USD left in the margin account. Shouldnt the margin call come when the stock price is at 62,5USD and the position is under water by 100*12,5=1,250. -> 7,500-1,250= 6,250?

 

[Sixcarbs]

At $60, the maintenance margin requirement is:

$60 x 100 shares x 125% = $7500.

Between the initial sale and what he posted he started with $7500 in the margin account, but up $10 his 100 shares loses $1,000, and now he only has $6500 in his margin account and the maintenance requirement is $7500, so he needs to post $1,000 or be closed out.