Question

You purchased 800 shares of stock for $49.20 a share. The initial margin requirement is 65 percent and the maintenance margin is 35 percent. What is the lowest the stock price can go before you receive a margin call? What is your return if price per share goes up to $60 (assume no interest)?

		$9.27; 40%
		$26.49; 25.67%
		$17.22; 50%
		$26.49; 33.77%

Answer 1

Given that,

800 shares of stock are purchased for $49.20 a share

So, portfolio value = number of share* share price = 800*49.20 = $39360

initial margin = 65%

=> Own fund = initial margin*portfolio value = 0.65*39360 = $25584

Maintenance margin = 35%

So margin call will be received at price = original price*(1-initial margin)/(1-maintenance margin) = 49.2*(1-0.65)/(1-0.35)

=> Margin call will be received at price = $26.49

When stock price goes up to $60, profit = (new price-original price)*number of share = (60 -49.2)*800 = $8640

So, rate of return = profit/initial own fund = 8640/25584 = 33.77%

So, Option D is correct.