Please explain the calculations: An investor purchases 100 shares of Lloyd Computer at $26 a share. The initial margin requirement is 50 percent, and the maintenance margin requirement is 25 percent. At what price would the investor receive a margin call? A) 15.25. B) 19.45. C) 17.33. D) 26.00. Your answer: B was incorrect. The correct answer was C) 17.33. 26 * (1 - 0.5)/(1 - 0.25) = $17.33.
Here is one way to understand this formula: Maintenance margin = (# shares* New Price - Initial Debit)/ (#shares* New Price) 25%=(100*P-0.5*100*26)/(100*P). Solve for P, that’s 17.33
Since I am not good at memorising formulas, I had to do it the long way: Your equity=$1300 Your margin=$1300 (50% margin) if price drops to $17.33 (you have to choose the most likely price, i.e. trial and error), then Your equity=$433.5, ($26-$17.33*100 shares divided by 2 Your margin=$1300 (50% margin doesn’t change) Therefore your equity’s percentage of total value = $433.5 / $17.33 * 100 = 25% I know, it’s not elegant, but you can always reason it out instead of trying to recall a formula.
No need for trial and error:) Your account has to have the maintenance margin intact, or a call is received. That’s 25%. The maintenance margin is the the value of your OWN investment OVER the value of the ENTIRE investment (your investment to be at least 25%, or you get a margin call). Your investment is: 100 shares * New price - what you borrowed = 100*P-1300 The value of the ENTIRE investment: 100 shares *new price=100*P 25%=(100*P-1300)/(100*P). Solve for P.
That’s even better than the formula, because sometimes the question will hit you from an angle a little different from what the memorized formula says. So it’s good to reason it out like that. Cheers…
Thanks all, But somehow when I’m trying to solve the following, I am again making some mistake. My answer is (200a-8000)/200a = 0.25 >>>>>> a=53.33 Please once again help! An investor buys 200 shares of ABC at the market price of $100 on full margin. The initial margin requirement is 40% and the maintenance margin requirement is 25%. At what price will the investor get a margin call? A) $48. B) $100. C) $80. D) $112. Your answer: A was incorrect. The correct answer was C) $80. In a long stock position, the equation to use to determine a margin call is: long = [(original price)(1 − initial margin %)] / [1 − maintenance margin %] = $100(1 − 0.4) / (1 − 0.25) = $80
You incorrectly used 8000 as debit, when in fact 8000 is what the investor deposits as margin, and borrows 20000-8000=12000. By debit you should understand the ammmount borrowed, not the one deposited as initial margin. (200*P-12000)/(200*P)=0.25, solve for P=80.
The simplest way to do this is as follows no need to remember formula or do any trial an error. IF $1300 is 75%, then how much is 25% 25=1300/75 = 17.33 ofcourse this is hacky, but it is sweet!!!