Question

you purchase $8000 worth of company X stock on margin (50% initial margin account). the stock was selling at $40 at the time. the maintenance margin is 30%. if the stock price falls to $25, how much is the margin call?

Answer 1

Sol:

Stock purchase value = $8000

Selling price = $40 per share

Number of share purchased = 8000 / 40 = 200

Initial margin 50%

Borrowed fund = 50% of $8000 = $4000 in margin account

Own fund = 8000 x (1-50%) = $4000

Maintenance margin = 30%

To determine margin call If stock price falls to $25 is as follows:

Stock value = 200 x 25 = $5000

Borrowed fund = $4000

Remaining margin = Stock value - Borrowed fund = 5000 - 4000 = $1000

Margin balance in percentage = Remaining margin / Stock value x 100

Margin balance in percentage = 1000 / 5000 x 100 = 20%

Margin call to maintain margin of 30% will be 10% of stock value = $5000 x 10% = $500

Therefore margin call will be for $500