Question

You decide to buy 1,300 shares of stock at a price of $36 and an initial margin of 65 percent.

Answer 1

Answer:

Maximum percentage decline in the stock will be 12.5%

Explanation:

It is given that number of shares which is bought is 1300 at a stock price of $36 an an initial margin of 65 %

Maintenance margin is given as 40%

Margin call price is equal to $=stock\ price\times \frac{1-initial\ margin}{1-maintinance\ margin}$

So margin call price $=36\times \frac{1-0.65}{1-0.40}=31.5$

So percentage decline $=\frac{31.5}{36}\times 100=87.5$ %

So maximum percentage decline in stock before you will receive a margin call is 100 -87.5 = 12.5%

So answer will be 12.5 %