Problem
You are buying 100 shares of Netflix at the market price of $500 per share. You have $30,000 of your own money and borrows the rest of money for the purchase of the stock. The interest rate on the loan is 10%. Suppose your broker's initial margin requirement is 60% of the value of the position and maintenance margin is 30% of the value of the position.
I. If the share price falls to $400 (20% drop) per share by the end of the year, what is the remaining margin in your account?
II. What is the rate of return on your investment if the share price falls to $400 per share by the end of the year?
III. Assume that a year has passed. How low can Netflix's price fall before you get a margin call?
IV. Assume that you shorted 100 shares at the market price of $500 per share and a year has passed. How high can Netflix's price go before you get a margin call?