Question

Your brother purchased 400 shares of stock for $28.50 a share. The initial margin requirement is 60% and the maintenance margin is 30%. What is the maximum percentage decrease that can occur in the stock price before you receive a margin call?

Answer 1

Given that,28.5*

400 shares of a stock are purchased for $28.50 per share

initial margin = 60%

Maintenance margin = 30%

margin call will be received at a price of

Margin call price = original price*(1 - initial margin)/(1 - Maintenance margin)

=> Margin call price = 28.5*(1 - 0.6)/(1-0.3) = $16.29

So, percentage decrease in price = (28.5 - 16.29)/28.5 = 42.86%

the maximum percentage decrease that can occur in the stock price before you receive a margin call is 42.86%