Question

An investor has $20,000 in his trading account and he borrows an additional $20,000 from his broker. He invests the total amount in a stock at $30 per share. Assume the maintenance margin is 40%, at what price will the investor first receive a margin call

Answer 1

Answer: $25

Explanation:

Margin call = Initial price * (1 - initial margin) / ( 1 - maintenance margin)

Initial margin = Personal amount invested / Total amount invested

= 20,000 / (20,000 + 20,000)

= 0.5

Margin call = 30 * (1 - 0.5) / ( 1 - 0.4)

= 30 * 0.8333

= $25