Question

you purchased 200 shares of hookah pens on margin at $50/share. the initial margin is 50% and the maintenance margin is 30%. at what price does hookah pens fall to in order to receive a margin call (assume no dividends and ignore interest on the margin loan

Answer 1

Given,

No. of shares = 200 shares

Margin price = $50

Initial margin = 50% or 0.50

Maintenance margin = 30% or 0.30

Solution :-

Loan amount = No. of shares x margin price x initial margin

= 200 shares x $50 x 0.50 = $5000

Let assume price be 'P'

Maintenance margin = [(No. of shares x P) - loan amount] (no. of shares x P)

0.30 = [(200 shares x P) - $5000] (200 shares x P)

0.30 = [200P - $5000] 200P

0.30 x 200P = 200P - $5000

60P = 200P - $5000

60P - 200P = -$5000

-140P = -$5000

P = -$5000 -140P

P = $35.71

So, at $35.71 hookah pens fall to in order to receive a margin call.