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) ?
( 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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