An investor purchased 550 shares of Akley common stock for $38,500 in a margin account and posted initial margin of 50% of this amount. The maintenance margin requirement is 35%. If the price of Akley falls to $52 per share, the investor: A. is not required to deposit more equity to maintain the long 550 share position. B. must deposit $9,900 to meet the resulting margin call. e. must deposit $5,775 to meet the resulting margin call. D. must deposit $660 to meet the resulting margin call. As per the ans. given in Schewser is : D The investor has borrowed 0.508,5(0) = 19,250. When the price falls to $52, the investor has an equity balance of 52(550) - ]9,250 = 9,350. Maintenance margin is 52(550)(0.35) = 10,010 and the margin call will be for 10,010 - 9,350 = $660. I htink the ans should be B. 9900. Reason : when there is a margin call the variation margin is to bring it to the initial margin level and not to the maintenance margin level. Correct me if i m wrong.
You have to deposit enough to reinstate the maintenance margin, not the initial margin (you buy stock, not futures). Let’s work at stock price level, is simpler. So the initial price paid for a share was 38,500/550=$70. You had to deposit 50% margin, that is $35 for each share bought. The stock drops to 52, that is a loss 70-52=$18 per share. This amount is deducted (marked to market) and reduces the initial deposit made from $35 to $17 for each share. You are required to have in your account at least 35% of the current share price per each share, that is 35%*$52=$18.2 for each share bought. But you have only $17. You will get a call to bring the margin account to the required $18.2 per each share bought, this would be a call for a total of ($18.2-$17)*550 shares=$660.