 # Margin Call

8% margin lending rate 50% initial margin maintenance margin requirement 25% Buys 20,000 @ \$40 He gets a margin call, which is the closest to the price? A) 27.00 B) 28.00 C) 29.00 D) 30.00

C maintenance margin is the minimum % of equity price that should be in the account. he started with 50% of equity price( or \$20). his balance will be at 25& when the value of stock is at 30. margin call is issued when it falls below 25%.

Use my newly invented formula borrows 400000 so if 75% = 400k then 100% = 533,333.33 divide by shares = 26.66 A is the answer. However, I have 2 questions. i) Is margin lending rate being deducted upfront while giving out the loan, or being deducted later on when you are selling the security. ii) Additionally what’s the time period for this trade? Based on those two questions my answers would differ. If yuou assume that margin is being deducted upfront, then loan is 432k so again my formula if 75% = 432k then 100% = 576k divide it # of shares = 28.80 so the answer you get is C. However I’d sue the broker to take out 8% from the trade right away… thats now how things work in real life. 8% is supposed to the lending rate for the entire on year i am thinking.

could be D. if landing charges are deducted from the account

rahulv Wrote: ------------------------------------------------------- > C > > maintenance margin is the minimum % of equity > price that should be in the account. > he started with 50% of equity price( or \$20). his > balance will be at 25& when the value of stock is > at 30. > margin call is issued when it falls below 25%. What do you mean his balance will be at 25& when the value of stock is 30. if the value of the stock is at 30, which means the market value is 30x20000 = 600k; and loan 400k. and equity 200k equity % = 200/600 = .33 not 25% as you say.

Its C. I like your formula pepp, its easier to understand than the one they gave. 25% = (500*P) -10,000 -800/500*P You do have to use the 432 for the 8% lending rate… I use schweser and I don’t remember working any problems like this. I’m thinking the exam will have a problem looking like this.

thx, btw i discovered this formula today when I saw a lot of people were having difficulty remembering the formula. I for myself haven’t even studied the SS where they discuss margin calls. hehe but while reading analysts forum I spent some time thinking about this margin related problems and came up with my formula. i hope it always works. read the below post to get more ideas http://www.analystforum.com/phorums/read.php?11,711822

(forget number of shares and assume you have bought 1 share for 40\$) 50% initial margin = 20 per share. money from broker =20 25% minimum margin requirement = 25% of initial price =10\$ when the share price falls to 30\$, balance in the account is 10\$ or just 25%

when teh share price falls to 30. the total worth of equity = 600k loaned amt stays the same = 400k. hence your equity portion is 200k so 200/600 = 33% equity. you haven’t hit your 25% yet. do I make sense? can anyone else shed some light and let me know if i am doing it correct.

rahulv Wrote: ------------------------------------------------------- > (forget number of shares and assume you have > bought 1 share for 40\$) > 50% initial margin = 20 per share. \> \> money from broker =20 > > 25% minimum margin requirement = 25% of initial > price =10\$ > > when the share price falls to 30\$, balance in the > account is 10\$ or just 25% The flaw in your methodology is that you are assuming that margin maintenance requirement is based of intial market value of the stock == which is not true.

> > The flaw in your methodology is that you are > assuming that margin maintenance requirement is > based of intial market value of the stock == which > is not true. yes you are right. :-). thanks for forcing me to revisit equities.

just take equity position (0.5 x \$40 =\$20) x 1.08 =\$21.6 \$21.6/(1-0.25) = \$28.8 C

Could somebody say how the margin interest is treated in this question? I think it doesn’t have any effect because margin is a finance charge that doesn’t have any effect on the price at which the margin call is raised. You are going to pay the margin interest whether the stock price go up or down. I see some of you calculated the margin call price to be \$28.80. If thats the case you are not suppose to get a margin call at \$29. I am kind of confused now. The formula that I have been using is: stock price (1 - Margine %)/ 1- maintenance margine %) If I follow this formula I get 26.66. We don’t have an answer which is \$26.66 or below to choose from.

Margin interest is accrued daily but this is not related to the question because you don’t know for how long this transaction has been going on. Answer is A.

In real-life your margin requirements depend on every stupid little charge they can think of to your margin account including interest requirements. On this problem and most CFA problems you should just ignore it.

C if u deduct lending rate right away. So the borrowings are 432k. If the borrowing is at 400k, then A… So the question is, how do we use the lending rate? Is it an interest rate or is it a cost that gets added on in the beginning.?

“Hi John, yeah this is tsetse and I was thinking about that stock I bought on margin yesterday? Could you deduct the first year’s interest from my margin account today and base any future margin calls on the lower balance in my account? Hey thanks! OK, I love you too”

LOL. Thanks Joey for your sense of humor, as I do need it at 3:44am…

Are you on Sunday or Monday?

Monday, its a stat holiday over here in Vancouver, Canada.