Question

An investor buys 16000 shares of ANACAM in ISE at the current price of $3.20 per share. He decides to buy on margin showing 16000 shares as collateral since he believes that the shares will go up in a short period of time. The brokerage firm charges 25% for credit. If the initial margin limit is 50% and maintenance margin is 35%.

A) What will be his net profit if ANACAM shares go to $5.5 per share in 15 days. How much additional profit he gains by buying at margin?

B)If the price falls to $2.2 per share in 25 days; does he receive a margin call? If so, how much must he pay in cash?

Answer 1

A) Required Initial Margin=16000*3.2*50%=$25600

Gross profit=16000*(5.5-3.2)=36800

Credit Charge=16000*3.2*50%*(25%*15/365)=263.01

Net Profit=36800-263=$36537

With $25600, he could have bought =25600/3.2=8000 share and he would have make profit of =8000*(5.5-3.2)=$18400

Hence, additional profit he will make= 36537-18400=$18137

B) If the share price falls to 2.2

Then his equity=25600-16000*(3.2-2.2)-25600*(25%*25/365)=9161.64

His maintenance margin=16000*3.2*35%=17920

As his equity falls below $17920, he will receive margin call and he must pay =(17920-9161.64)=$8758.36 to bring the equity back to maintenance margin.