Question

You purchased 200 shares of ABC common stock on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the stock drops below what price? (Assume the stock pays no dividends, and ignore interest on the margin loan.)

Answer 1

Answer:

Margin call will be obtained if the stock price drops below $35.71

Explanation:

Here in this question, we start by calculating the maintenance margin

Mathematically;

Maintenance margin = Equity/market value

From the question, maintenance margin= 30%

= 30/100 = 0.3

Let the unknown price be P.

Thus, the market value of the 200 shares at price P is 200p

Hence;

0.3 = (200 * p - purchased stock value * initial margin)/200p

0.3 * 200p = 200p - 200(0.5 * 50)/200p

0.3 * 200p = 200p - 5000

60p = 200p -5000

140p = 5000

p = 5000/140

p = $35.71