This is a concept checker question in schweser. An investor buys 100 XYZ shares. Market price is $50 on full margin Initial margin req = 40% Maintenance margin = 25% At what price will the investor get a margin call? Schweser provides the following answer Margin call trigger Price = Init price (1-Init. margin)/(1-Maintenance margin) = $40. If we go by the CFAI text, Investor equity/ Total value = maintenance margin (i.e your equity cannot be less than M% (maintenance margin) of the total value to avoid margin call) to find the price Say ‘P’ is the margin call trigger price (100P - Initial margin paid by investor)/ 100P = 25% 100P - .4*5000 = .25*100P 75P = 2000 P=26.67 Is this the right way to do it ?? What am I missing here? Would appreciate anyone’s help. Thanks!!
I get $40 - also using the schwesser formula. don’t have CFAI books handy to check there version.
Your error is that the margin the percentage of EQUITY in the account required. So, and initial Margin of 40% means you BORROW 60%, or $30, and your equity (or MARGIN) = P - the amount of debt, or P-($50*0.6) = $30. So, solve for P in 0.25 = [P- 0.6(50)]/P ==> 0.25P = P-30 ==> 30 = 0.75P ==> P = 40 To verify, calculate the EQUITY in the account at P=$40: At P=40, you have $30 of debt and equity (or “margin”) of $10, or 25% remember - the MARGIN is the EQUITY, not the DEBT.
I have a problem with a question below: Q: Jenson originally purchased 400 shares of CSC Stock on margin at a price of $60 per share. THe initial margin requirement is 50% and the maintainance margin is 25%. CSC Stock price has fallen dramatically in recent months and it closed today with a sharp decline bringing the closing price to $40 per share. Will Jension recieve a margin call? A) Yes, He does not meet the Minimum Maintenance Margin Requirement B) No, He meets the minimum initial margin requirement C) Yes He does not meet the Minimum Initial Margin Requirement D) No, He does meets the Minimum Maintenance Margin Requirement My answer is choice A based on schwser notes : Trigger Margin call = Po [(1-IM)/(1-MM)] = 60 [(1-0.5)(1-0.25)] = 40 However, the answer provided to me is choice D. Can anybody explain me why it is choice D?
thanks, it was a stupid mistake… in the CFAI example, the margin was 50%, and b’cos this fig. was used I blindly used the margin% in the calc.
I always find it easier to understand the concept and build the equation from the concept, not the other way around. So let’s see: 1. buy 400 shares, @$60, with a maintenance margin of 25% and an initial margin requirement of 50%. Great, that means the buyer paid 50%*400*$60 and borrowed the rest, that is: half paid, half borrowed ($12,000 paid, $12,000 borrowed). 2. The maintenance margin is nothing more than a way for the broker to make sure that in the margin account it will always have at least 25% of the initial value of the margin. That is, at any time, (Current value of the portfolio – Amount borrowed)/Current value of the portfolio = Margin requirement 3. Now plug in all the data: Current value of the portfolio: 400*$40=$16,000 Amount borrowed: $12,000 ($16,000-$12,000)/$16,000 = $4,000/$16,000 = 25% The amount in the margin account meets the required 25% maintenance margin. Answer D is correct. kallis21 Wrote: ------------------------------------------------------- > My answer is choice A based on schwser notes : > Trigger Margin call = Po [(1-IM)/(1-MM)] > = 60 > [(1-0.5)(1-0.25)] > = 40 > > However, the answer provided to me is choice D. > Can anybody explain me why it is choice D?