Question

You purchased 700 shares of stock at a price of $73 per share on 50% margin. If the maintenance margin is 40%, what is the critical stock price? Show all work.

Suppose that in the previous problem you shorted 700 shares instead of buying. The initial margin is 50 percent. If the maintenance margin is 40%, what is the critical stock price? Show all work.

Answer 1

a. Amount Borrowed = [No. of Shares x Share Price] - [1 - Initial Margin]

= [700 x $73] x [1 - 0.50] = $51,100 x 0.5 = $25,550

Margin Call Price = [Amount Borrowed / No. of Shares] / [1 - Maintenance Margin]

= [$25,550 / 700] / [1 - 0.40] = $36.5 / 0.6 = $60.83

b. Proceeds from short sale = No. of Shares x Share Price = 700 x $73 = $51,100

Initial Deposit = Sale Proceeds x Initial Margin = $51,100 x 0.5 = $25,550

Account Value = Sale Proceeds + Initial Deposit = $51,100 + $25,550 = $76,650

Margin Call Price = Account Value / [No. of Shares + (Maintenance Margin x No. of Shares]

= $76,650 / [700 + (0.40 x 700)]

= $76,650 / 980 = $78.21