Question

PLEASE ANSWER PART D AND EXPLAIN HOW TO GET THE NUMBER FOR "AMOUNT BORROWED" THANK YOU!

Margin: Assume your brokerage account requires an initial margin of 50% and a maintenance margin of 30%. Assume you have $15,000 in cash in your account.

A. How many whole shares of Facebook can you buy if FB is $195/share?
B. If FB falls to $175/share (~10% loss of value), how much money will you have lost?
C. If FB increases to $250/share (~28% gain), how much money will you have made?
D. At what price will you receive a "margin call" for FB?

Answer 1

Current market price of Facebook = $195 per share

Own fund = $15,000

Assume your brokerage account requires an initial margin of 50%

Borrowed amount (from broker) = $15,000 (other 50%)

Total money in brokerage account = $15,000 + $15,000 = $30,000

Number of share’s purchased = $30,000/ $195 = 153.85 or 153 whole shares   (but in this case borrowed fund is only $14,835 not $15,000 as to purchase 153 shares amount required 153 * 195 = $29,835)

Therefore actual borrowed amount = $29,835 - $15,000 = $14,835

The maintenance margin = 30%

Now assume that Intel's price fall to P before you get a margin call, therefore

The maintenance margin = (No. of shares *P – borrowed amount) / No. of shares*P

0.30 = (153*P − $14,835)/153*P

Or 45.9 *P = 153 *P − $14,835

Or 198.9 *P = $14,835

Or P = $14,835 /198.9 = $74.59

Therefore you will get a margin call if the price of Facebook will fall below $74.59 per share