What is the intuition behind the calculation of margin call: trigger price = Po*[(1-initial margin)/(1-maintenance margin)]? Please explain. Thanks.
Its just the short cut formula to determine the price at which an investor who goes long on equities (using a margin account) receives a margin call.
imagine you have one share in a particular stock Po*(1-initial margin) is your initial cash outlay divided by 1- maintainence margin, which is how much the bank allows you to lose. is the price your margin call.
Thanks for your replies. I understand the interpretation but calculation-wise, why do we divide by 1-maint. marg.?