Question

Using a margin account, you purchased 100 shares at a price of $100 with an initial margin requirement of 60% and a maintenance margin requirement of 30% on the margin position.

You would get a margin call at a stock price of __________ and would have to deposit _______ with the broker.

Group of answer choices

$57.14; $1,714

$57.14; $3,428

$30.77; $2,154

$30.77; $3,077

$57.14; $4,000

Answer 1

So, the option A is the correct one.

Margin Call = Initial Purchase price * ( 1 - Initial Margin / 1 - Maintenance Margin)

= 100 * ( 1 - 60% / 1 - 30%)

= 100 * (0.40 / 0.70)

= 57.14

Now, The Amount has to be borrowed = Total Amount invested - Initial Margin

= (100 * 100) - (100 * 60%)

= $4000

Now, The Margin call triggers when the amount falls below

= Borrowed amount  / ( 1 - Maintenance margin)

= 4000 / ( 1 - 30%)

= 4000 / (0.70)

= 5714

Now, The Amount that has to be deposited = Margin Call amount - Borrowed funds

= 5714 - 4000

= 1714

So, the option A is the correct one.