3

Assume an investor goes long on X1 and simultaneously short on X2 both of which cost $1. With margin rate at 50% he is required to deposit 0.5 + 0.5 = $1 margin to make the transaction. My question how much he has to borrow for this transaction. The trading house will sell X2 and keep the proceeds of $1 by itself. Can this money be used to cover the remaining $0.5 on the long transaction of X1?. If someone has a clean mathematical formula for margin calculation in margin accounts I would very much appreciate to know about it?

1 Answer 1

1

In the US, the Reg T margin requirement for a short position in a marginable security is 150% of the sale price. The proceeds from the short sale can be applied to the margin requirement so effectively, the margin requirement is 50%. Therefore, the proceeds from the short sale cannot be used to cover the margin requirement on the long transaction.

4
  • Thanks. So how much money does he need to borrow for this transaction, $0.5 to cover the long position completely? Meaning that in order to cover a $1-long and a $1-short position he has to deposit $1 and borrow $0.5 and for the latter he needs to pay interest? Feb 2, 2023 at 13:27
  • I understand long margin as well as short margin but when combined, I'm not 100% sure of the answer. As far as I know, there is a special dispensation for a portfolio margin account. FINRA states that with PM, the combination of long and short positions is subject to something in the vicinity of 15%. For a traditional customer at 50% Reg T margin, I believe that your conclusion is correct. It would take 50 cents to support each $1 position ($1 total) and it would entail 50 cents of borrowing for the long position. Feb 2, 2023 at 22:53
  • Thank you very much Bob. That helps a lot. Can you please send me a reference (link) to the 15% dispensation you are talking about? Feb 5, 2023 at 8:18

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .