Question

An investor long purchases 300 shares of a stock for $39 per share on margin. The price decreases to $32 after 6 months. The initial margin is 50% and the maintenance margin is 35%. Will there be a margin call? Assume there are no other securities in the account.

a. No because the current margin is 39%

b. yes because current margin is 32%

c. yes because the current margin is 39%

d. no because the current margin is 44%

Answer 1

Shares purchased for $39*300 = $11,700

Value after 6 months $32*300 = $9,600

Loss suffered = 11,700-9,600 = $2,100

Initial Margin = 50% * 11,700 = 5850

Maintainance Margin = 35% * 11,700 = 4,095 ( this amount has to be maintained always)

Value of initial margin after the loss = 5,850-2,100 = $3,750 ( the level of initial margin has fallen below the maintainance margin)

So there will be a margin call

Current margin % = 3750/11700 * 100 = 32.05% (option b)

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