Question

You buy 5000 shares of stock at a price of k380 and an initial margin of 60%. if the maintenance margin is 30%.

Required:

(i). At what price will you receive a margin call? [8marks] (ii). Calculate your return should you sell the shares at k400 per share [6marks]

Answer 1

1.
Margin=(Number of shares*Price per share-Borrowed Amount)/(Number of shares*Price per share)
=(Number of shares*Price per share-Number of shares*Purchase Price*(1-Initial Margin %))/(Number of shares*Price per share)

Margin call occurs when margin is less than maintenance margin

Hence,
(Number of shares*Price per share-Number of shares*Purchase Price*(1-Initial Margin %))/(Number of shares*Price per share)<=Maintenance Margin

Let P be the price at which margin call occurs

(5000*P-5000*380*(1-60%))/(5000*P)<30%
=>P<217.143

So, margin call will occur when price falls below 217.143

2.
=(Number of shares*(Selling Price-Purchase Price))/(Number of shares*Purchase Price*Initial Margin %)
=(5000*(400-380))/(5000*380*60%)
=8.7719%