Question

Rob Lucas is very optimistic about the profitability of Wal-Mart Corp. such that he invested in 10,000 shares at the end of the day. The current market price of a share of common stock of Wal-Mart is $100. The conditions are 50% of initial margin and a maintenance (minimum) margin of 30%. Surprisingly the next day, at the opening of the market, the price decreases to $90,

a) Rob’s equity position before and after the price decrease

b) The rate of return on his position

c) Would he receive a margin call? Determine the price at which Rob would receive a margin call.

Answer 1

a) Equity Position before price decrease = 10,000 *100 = 1,000,000
Equity Position after price decrease = 10,000 *90 = 900,000

b) The rate of return = (900,000 - 1,000,000)/1,000,000 = -10%

c) No  , he would not receive margin call because Current price is more than margin call price

Loan Amount = 50% * 1,000,000 = 500,000
Let Price at Which Margin Call = P
Minimum Margin = (10,000* P- 500,000)/10,000*P = 30%
10,000 P - 500000 = 3000P
7000P = 500000
P = 71.43(Price at which there will be a margin call)

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