Sara takes a long position on bond with $100,000 principle initial marine= $1000; maintenance margin 75% of that. Contract quote 108.14( quoted in 32nd) at purchase time bonds prices over the next four days are Day 1. 108.18 2. 108.12 3. 108.26 4. 108.31 which of the following is closest to the price at which Sara margin bakance is would be $750? a. 108.00 b. 108.06 c. 108.08 d. 108.22 please give an explanation.
Quoted in 32’s, that means the contract quote is 108+14/32=108,437.5 Initial margine 1000 maintenance margin: 75% of 1000=750 Since this is a security, not a future contract, any margin call is made to bring the margin account to the maintenance margin, not to the initial margin. Therefore, if, and when, the account goes below the maintenance margin, the long gets a call. Long gets a call when the price of the security drops, so we eliminate D. Since we are looking for the price of the security when the adjustments in the daily margin account bring the security to its maintenance margin. What is the difference between the initial and the maintenance? 250. Price of the security: 108,437.5. Price causing the margin account to go to 750: 108,437.5-250=108,187.5 108+X/32=108+0.1875=>0.1875=X/32, X=6. Should be B.
Are you sure that the principle is 100,000 ? Even for the lowest possible price 108.00 the loss is less than 250 (1.08- 1.0814) *100,000 = -140 so the margin balance is 860 !!! 107.89 should be the price for the margin call !!!
Missed 1/32 !!! Crap !!!
Yes its 100,000 the answer is B as well explained by MAP. Thank you Map. With margin problems i usually use the formular margin trigger price= Po *1-initial margin/1- maintance margin. Is it possible to use it in this problem. whem i tried i had the price at which he would get the margin call (it was 108.16) but could not tell how i would relate it to the 750 in the question.
Another way: daily mark to market: Day 1. 108.18 : a gain of 4/32 2. 108.12 : a loss from the previous day, bringing the margin to -2/32 3. 108.26 : a gain from the previous day, bringing the margin to 12/32 4. 108.31 : a gain from the previous day, bringing the margin to 17/32, and that’s over the initial margin of 1000. To consume all the surplus, and 250 more, that is a total of 17/32 plus another 8/32 (for the extra $250), total 25/32, that is 108+14/32+17/32-25/32=108+6/32, that is 108.06 quoted in 32’s.
Map you are now complicating my already troubled life. the first method was abit easier fpr me to follow. i can’t figure out where you are the -2, 12, 17 from. please also try to answer my question above. thank you in advance
Yes, it would work, but instead of maintenance margin, use 750 (in particular, in this case, the maintenance margin coicides with the 750 margin account we are looking for).
Good job map1. Also it is easier to just consider how many 32nds it takes to generate a loss of $250. $250/32 = 7.8 or 8 32nds. So, price drops from 108 and 14 32nds to 108 and 6 32nds.