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Difficulty: HardMargin Accounts and Borrowing Requirements

An investor opening a new margin account executes an initial transaction selling short 150150 shares of a marginable stock at $16\$16 per share. What is the minimum cash deposit required from the investor to satisfy Federal Reserve Regulation T and FINRA initial margin requirements?

  1. A
    $1,200\$1,200
  2. $2,000\$2,000Answer
  3. C
    $2,400\$2,400
  4. D
    $3,200\$3,200

Answer

The minimum cash deposit required is $2,000\$2,000.
The total short sale value is 150 shares×$16=$2,400150 \text{ shares} \times \$16 = \$2,400. Under Federal Reserve Regulation T, the required margin is 50%50\% of the trade value ($1,200\$1,200). However, FINRA rules specify an absolute minimum initial equity deposit of $2,000\$2,000 for margin account transactions. Since $2,000\$2,000 exceeds the $1,200\$1,200 Regulation T calculation, the customer must deposit $2,000\$2,000 in cash.

Step-by-Step Solution

1
Calculate the total market value of the short transaction.
Total Short Value = 150 shares×$16=$2,400150 \text{ shares} \times \$16 = \$2,400.
Margin requirements are based on the total market value of the trade.
2
Calculate the Federal Reserve Regulation T initial margin requirement.
Reg T Requirement = 50% of $2,400=$1,20050\% \text{ of } \$2,400 = \$1,200.
Regulation T mandates a standard initial margin requirement of 50%50\% for marginable transactions.
3
Apply FINRA's minimum initial equity requirement rule.
FINRA Minimum Equity Requirement = $2,000\$2,000.
FINRA rules state that the minimum initial equity to open a margin position is $2,000\$2,000 (or 100%100\% of the purchase price if the total transaction value is less than $2,000\$2,000).
4
Compare the Regulation T requirement with the FINRA minimum requirement.
Required Deposit = max⁡($1,200,$2,000)=$2,000\max(\$1,200, \$2,000) = \$2,000.
The investor must satisfy the stricter of the two regulatory requirements.

Key Concept

Initial Margin and FINRA Minimum Equity Rule for Short Sales
Estimated Time:1m 30s
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Topics

Margin Accounts and Borrowing Requirements