an investor open an margin account with initial deposit of $5000. He then purchases 200 shares of PRK stocks at 46 in his margin a/c, which has a margin maintenance requirement of 25%. Ignoring commissions and interest, the min price that PRK stock can fall to before that investor receives margin call is closet too?? a. 16.80 b. 20 c. 28 d. 33 I keep on getting $33 “D” as the answer. Solution says C…
i’ll take a stab… 200*46 = 9200 5000 / 9200 = 54% so initial margin was 46% $46 * (.46/.75) = 28
What are the input in the formula? .25 = {200§ -5000} /200P ??? If i Use this I get 33…
formula for margin call is: P0 * [(1 - initial margin) / (1 - maintenance marging)] $46 * [(1-.54) / (1-.25)]
He bought 9200$ of shares. He only deposited 5000$. That means his initial margin is 5000/9200 = 54% Then just plug in 46 X (1-.54/1-.25)
P0 * [(1 - initial margin) / (1 - maintenance marging)] …thanks… When do we use… P0 * [(1 + initial margin) / (1 + maintenance marging)]
When you’re holding a short position You would use 1 + IM / I +MM
thanks…
it helps me to remember it this way: on a margin, you don’t want the price to go down, so use the minus sign. on a short, you don’t want the price to go up, so use a plus sign.