Could someone help explain the answer to the following question ? According to my calculations the price would have to be 33.33 for the short position to receive a call. Thanks. --------------------------------------------- An investor short sells 400 shares of Disney for $25 a share. The initial margin requirement (IMR) is 50 percent, and the maintenance margin requirement (MMR) is 25 percent. At what price would an investor receive a margin call? A) $20.00. B) $30.00. C) $22.00. D) $35.00. Your answer: D was incorrect. The correct answer was B) $30.00. Ps = [25(1 + 0.5)] / 1.25Ps = 30.00.
This is a formula that is there in Schweser – but I have not seen it anywhere else. Margin, Short, Price for a call = P * (1+I) / (1+M) I=Initial Margin, M=Maint Margin. For Margin, Purchase : P ( 1-I) / (1-M)
yeah i can’t seem to find it in the CFA books…not sure that type of question would really be asked
I don’t know about these formulas. Why would anybody try to memorize that? So if the initial margin is 50%, you put up 12.50. The question is what price does the stock need to rise to so that you now have less than 25% of the stock’s price in your margin account. A little algebra does it - (12.50 - x)/(25 + x) = 0.25 12.5 -x = 6.25 + .25 x 6.25 = 1.25 x 5 = x or even easier is to check out the only two possible answers (30, 35) - e.g. - if the stock goes to 35 you have lost $10 per share in your margin account leaving you with $2.50 per share which ain’t 25% of 35.