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 am confused myself now… CFA book p.58 says: The price change would need to fall for a long position by the difference between the initial and maintenance margin requirements.
- buy 100 shares, @$50, with a maintenance margin of 25% and an initial margin requirement of 40%. This means the buyer paid 40%*100*$50 and borrowed the rest, that is: $2,000 paid, $3,000 borrowed. 2. The maintenance margin is nothing more than a way for the broker to make sure that the margin account will always have at least 25% of the initial value of the margin. That is, at any time, (Current value of the portfolio – Amount borrowed)/Current value of the portfolio = Margin requirement 3. Now plug in all the data: Current value of the portfolio: 100*$P Amount borrowed: $3,000 (100*P-$3,000)/100*P = 25%, solve for P = $40 The amount deducted is not the amount invested/paid by the buyer at initiation, but the amount borrowed.
i dunno what happened…someone already replied for this and thread is gone…
I think you made 2 threads strating with the same question. Here is the other one: http://www.analystforum.com/phorums/read.php?11,805671
ya i guess so…'cos the first time i tried to post it, it said error while trying to post. So i ended up posting it twice thinking it did not get posted the first time