Question

Suppose that you just purchased 200 shares of Beta Banana’s stock for $60 per share. The initial margin requirement is 65.5%, which means the amount borrowed is $4,140. The corresponding balance sheet is below:

Assets		Liabilities and Equity
Stock	$12,000.00	Loan from broker	$4,140.00
		Equity	$7,860.00
Total assets	12,000.00	Total liabilities and equity	$12,000.00

a. Now suppose the price of the stock falls to $37 per share. What is your current margin percentage? (Round your answer to 2 decimal places.)

Margin percentage              %

b. Construct the balance sheet to show the current situation.

Assets		Liabilities and Equity
Stock	$	Loan from broker	$
		Equity	$
Total assets	$	Total liabilities and equity	$

c. If the maintenance margin is 40%, what is the highest stock price that will trigger a margin call? (Round your answer to 2 decimal places.)

Price            $

Answer 1

200 shares of Beta Banana’s stock for $60 per share. The initial margin requirement is 65.5%, which means the amount borrowed is $4,140

current balance sheet

Assets		Liabilities and Equity
Stock	$12,000.00	Loan from broker	$4,140.00
		Equity	$7,860.00
Total assets	12,000.00	Total liabilities and equity	$12,000.00

a). if stock price fall to $37,

so Portfolio value = 37*200 = $7400

own fund = 7860-23*200 = $3260

So, Current margin = 3260/7400 = 44.05%

b). balance sheet

Assets		Liabilities and Equity
Stock	$7,400.00	Loan from broker	$4,140.00
		Equity	$3,260.00
Total assets	$7,400.00	Total liabilities and equity	$7,400.00

c). if maintenance margin = 40%, let price of stock at this be X

So, 0.4 = (7860 - (60-X)*200)/(X*200)

80X = 200X - 4140 => X = $34.5

the highest stock price that will trigger a margin call = $34.5