Why are you up so early? Is the exam causing you lots of stress?
Just studying… I haven’t slept yet. About to though. Thought I would take a break by doing some forum questions. HAHAH Good night.
So you are still on Sunday… Go to bed.
pepp Wrote: ------------------------------------------------------- > thx, btw i discovered this formula today when I > saw a lot of people were having difficulty > remembering the formula. > >> > http://www.analystforum.com/phorums/read.php?11,71 > 1822 Would it a surprise for you that this formula is in the CFAI text, volume 5, p. 28-29?
If it is there good, I haven’t read that study session, why are people struggling with margin calls question. I trade few stocks here and there, so i made sure i understand whats going on. never really read the study sessions. most people say they using the formula where it is P x something something (1-something) / (1- something). I say forget all that. Just take the borrowed amt, divide what it represents of the total position and divide by # of shares.
2 steps step 1 beg balance * (1 + lending rate) = .5 * 40 * 1.08 = $21.6 step II step 1 answer/(1- MM) = &21.6/(.75) I got $28.80, so C since we always round up!
uh isn’t the 8% lending rate a red herring. Think about it…what are you going to use for T…the positions could be 3 days old or 3 years old. The answer should be A.
Answer is A Think of it this way - amount borrowed = 0.5 of investment value As the investment falls in value, the amount borrowed stays constant. So at what point will there be a margin call? When the amount borrowed exceeds 75%. if X = the investment value, then it can be written as 0.75 times X = 400 000 therefore X = 533 333 So when the investment is valued at 533 333 there will be a margin call = at $26.66 per share which is A
2 steps step 1 beg balance * (1 + lending rate) = .5 * 40 * 1.08 = $21.6 step II step 1 answer/(1- MM) = &21.6/(.75) I got $28.80, so C since we always round up!
So I asked a Stalla academic support staff: When buying on margin, with borrowing from the broker at a lending rate, is the cost of borrowing deducted from the portfolio value (as the debit is) when calculating the margin call price of the security? And the answer was: “It probably is, in practice. However, for these types of problems it is usually assumed that any interest expense is paid separately. This simplifies the problem.”
Well, watching margin accounts in practice, borrowed funds seem to be the initial loan plus a monthly capitalisation of the interest rate. But given that this question doesn’t say when the margin call occured (it could have happened 5 seconds after the trade was made) I would think you would have to ignore the lending rate.
Remeber the simple formula: Trigger price to get a margin call = Price * (1-initial margin requirement) / (1-maintenance margin requirement ) = 40 * (1-.5)/(1-.75) = 26.666 approx. $27 A is the answer For a short sale: Trigger price to get a margin call = Price * (1+initial margin requirement) / (1+maintenance margin requirement )