Hi guys, I got some problem in understanding the formular for IM(Initial Margin) and MM(Maintenance Margin), pls help. There are two formula: For Long position, P1 = P0*(1-IM)/(1-MM); For Short position, P1 = P0*(1+IM)/(1+MM). I understand the first one, based on LMV (Long Market Value) - Debit = Equity. when first hold a long position, P0 * N = Debit + P0 * N * IM later price changed from P0 to P1, P1 * N = Debit + P1 * N * MM Debit is the money that borrowed from the broker, this won’t change, so, Debit = P0 * (1-IM) = P1 * (1-MM) => P1 = P0 * (1-IM) / (1-MM). But I don’t understand the 2nd formula for short position, anyone can help me here? Thanks very much!
Your formula is correct… New maint. margin call price = (purchase price * (1+Initial Margin))/(1+Maint. Margin). The numerator is different because this is a short position, and the brokerage firm is worried about the stock price climbing to a point at which you can’t afford to buy back the shorted stock. The exact opposite of a long position. Did that help?
I still don’t get it. In a short position, I don’t really borrow money from the broker, the equations are: at beginning, N*P0 = Debit + N*IM*P0; I assume the money N*IM*P0 is put under broker’s pocket, later price come to P1, N*P1 = Debit’ + N*MM*P1. here N*MM*P1 = N*IM*P0. the number of Debit changed to Debit’, but this doesn’t matter. so the equation lead to P1 = P0*IM/MM. well, I’m lost here.
Remember that with shorting, you post margin ON TOP of the stock price. Say stock is $100 and 50% initial margin. Your account contains $100 + $50 = $150. That’s the basis for using “1+” in the formulas. That’s how I remember it
ok… so this is the way brokers are calculating… thanks Isura!
There is no way I would try to remember these formulas. Just remember how it works and calculate it long hand. The formulas are useful for writing computer programs and that ilk.