About margin call

I can really be able to figure out how to get the price when the margin call first occurs…

The current price of a stock is $25 per share. You have $10,000 to invest. You borrow an additional $10,000 from your broker and invest $20,000 in the stock. If the maintenance margin is 30 percent, at what price will a margin call first occur? (Level I 2012 Volume 5 Equity and Fixed Income, 7th Edition. Pearson Learning Solutions p. 75).


To pay back loan s/he needs to pay back half the purchase price i.e. $12.5 per share. So the amount going to him/her per share sold is p-12.5 Now we need the proportion going to him i.e. (p-12.5)/p to equal 0.3. So solve (p-12.5)/p=0.3. This gives p=12.5/0.7 = $17.86

Margin Requirement = 0.50 ($10,000 from $20,000 invested is a loan) Maintenance Margin = 0.30 Margin Call occurs at P = 25 x ((1 - 0.50)/(1 - 0.30)) = $17.86 If you can’t memorize the formula, just remember that in a long position, your margin call always occurs at a lower price, so you need to multiply the current price by a ratio < 1 using (1 - margin requirement %) and (1 - maintenance margin %). It’s as simple as that. Hope that helps.

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