Question

You borrowed $10,000 on margin to buy shares in Pai Corp, which is now selling at $20 per share. Your account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price falls to $15 per share.

A. What is the initial value of stock? (Hint: use initial margin=Equity/value of stock)

B. What is your margin at $15 (round to nearest percent: 54.72%>>55%) ?

C. Will you receive a margin call (Yes/No)?

D. How low can the price fall before receiving a margin call (round to nearest cent $xx.xx) ?

Answer #1

Solution :-

( A) Initial Value of the Stock = $10,000 / 50% = $20,000

Number of shares Buy = $20,000 / $20 = 1,000 Shares

(B) In case price of Share $15

Loss Per share = $20 - $15 = $5

Total Loss = 1000 * 5 = $5,000

Now Margin = $10,000 - $5,000 = $5,000

(C) Maintenance Margin = $20,000 * 35% = $7,000

Now as Value of Margin is less than Maintenance Margin

So , Yes we receive a call

(D) A Margin call is received when the margin goes below $7,000

Means after a Loss of $3,000 on 1,000 Shares

Means loss of $3 per share

the price can fall before receiving a margin call = $20 - $3 = $17

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