margin deposit 5k maint re of 25% buys 200 at $46. calc is (200P-$4200)/(200p)=.25 p=$28… so, 200 x $28 = $5,600 > initial marging of $5,000…? i’m a bit lost…
ok, step 1, relax… now, he bought 200 @ $46, so the total position is $9,200 his margin deposit is $5000, which represents a 54.35% margin requirement… on a per share basis, this equates to $25 (ie. 0.5435*46)… therefore he BORROWED $21 (ie. 46-25) so, the value of his equity (as a %) at any time is: (P-21)/P we know that the maintenance margin is 25%, so equate the two, and presto: (P-21)/P = 0.25 therefore P = 28
Or just remember: Call on Long position = P * (1 - IM)/(1 - MM) Call on Short position = P * (1 + IM)/(1 + MM) where IM and MM are %ges Just in case you haven’t got enough to remember…
yeh those equations never made intuitive sense to me, just looking at them… someone in another thread (forget where) explained it really well…
bewty - great help - i’m locking that in!!
Bluey touched on the mechanics, but conceptually, remember the following and it may help you reinvent the wheel on the test if you forget the formula: * The broker’s invested (lent) amount won’t change. Any change in price is *your* problem or *your* benefit. At the start, this is $5000 and represents about %54 of the total position - see bluey’s calc. * Repeat: the broker’s amount won’t change. * If the price falls, to, say, $30/share, recalculate the full position as $6,000, back out the broker’s piece of $4,200 (because it doesn’t change, they’re not the one invested!) and you’re left with 1,800 invested. You’re down to 30% of the total position (1800/6000) Now you can keep doing trial and error until you find the stock price that drops 30% down a bit further to 25%, the stated maint margin, or you can exercise a bit of algebra and back into it. I recommend the latter. That equation is stated in the first post of this thread. In case I forgot to mention it, the broker’s amount won’t change!
Does the broker’s amount change at all? =) Great explanation.
xxx bought 100 shares of common stock on margin. The price was $50 per share. He paid $3,000 and borrowed the remainder. At the time, the minimum margin requirement was 50%. The current maintenance margin is 40%. With a recent steady decline in the price to $44, he is concerned about receiving a margin call to send more funds to the brokerage firm to maintain his required margin. He will receive a margin call if the common stock falls to what level? a. $50 b. $33.33 c. $28.00 d. $26.40 Sorry for hijacking this thread, but how would the above equation p * (1 - IM)/(1 - MM) work for this question? thanks
You’ve got me!
OK, well let’s start with the obvious. It can’t be $50 otherwise he’d already have had a margin call. Actual IM = 60% but the minimum was 50% “current” MM = 40% If we use IM = 50% it gives us an answer that’s not up there. $41.67 (although it could be on the day). Using IM= 60%, gives us $33.33 That was my logic - not an exact science. Whats the answer?
The answer is B, and I get to the same answer as it can’t be any of the others, but not sure how they worked it out exactly. I’ll write down what the book says:- Choice b is correct. Initial Investment = 100 x $50 = $5,000 Margin = $3,000 Amount Borrowed - $5,000 - $3,000 = $2,000 Margin = (Market value of margined securities - Debit balance) / Market Value of margined securities 40% = (100P - $2,000) / 100P P = $33.33 ----------------------------------------- I’ve not seen it worked out like that before
Vicky’s formula should work on this problem p=50 IM=3000/5000=.6 MM=.4 plug in the number… (50*(1-.6))/(1-.4) = 20/.6 = 33.33 answer is B
I think the problem was where the minimum margin of 50% came into it. Obviously a red herring. REMEMBER - IM based on actual deposit!