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You short sold 500 shares of stock at a price of 36 dollars andan inital margin of 75 percent. if the maintenance margin is 25percent, at what share price will you receive a margin call? whatis your account equity at this stock price?

Margin call price?
Account equity?

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Nelly Stracke
Nelly StrackeLv2
28 Sep 2019

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Hello guys, I have a question and I found an answer but it missing some detailes so I need more explanation on this question please. Part B is missing and Part A, B needs more detailes

Suppose you purchase 1000 shares of Disney stock at $90 per share using margin. Your broker requires an initial cash investment of 60%.

A. If your broker requires a 40% maintenance margin, at what share price will you be subject to a margin call? Show all work.

B. If a margin call does occur, what alternatives do you have?

C. At the end of the year, suppose that the price per share of Disney is $86 and that Disney issued a dividend of $3 per share. Also, suppose that any interest charged on borrowed funds for one year is 10%. Calculate the return on your investment

ANS:

Total amount borrowed by the buyer of 1000 shares of disney stock = (1000 * 90) - (1000 * 90 * 60 %)

= 90000 - 54000

= $ 36,000.

Price of margin call = (36000 / 1000) / (1 - 0.40)

= 36 / 0.60

= $ 60.

Margin call price = $ 60.

Return on investment :-

= [ (1000 * 86) + (1000 * 3) ] - [ (36000 * 10 %) + (1000 * 60) ] / [ (1000 * 60) + (36000 * 10 %) ]

= [ 86000 + 3000 ] - [ 3600 + 60000 ] / [ 60000 + 3600 ]

= (89000 - 63600) / 63600

= 25400 / 63600

= 0.40 i.e., 40 % (approx)

Return on investment = 40 % (approx)

You want to short sell 100 shares of PQR using a 60% margin. Themaintenance margin is 30%. The current price of PQR is $40. Howmuch money did you have to invest today? What price will trigger amargin call? What is the overall rate of return on your investmentif the stock is selling at a price of $48 in 1 year? What is theoverall rate of return on your investment if the stock is sellingat a price of $34 in 1 year?

) You want to buy 100 shares of MNO using a 60% margin. Themaintenance margin is 30%. The current price of MNO is $70. Howmuch money did you have to invest today and how much money did youborrow? What price will trigger a margin call? What is the overallrate of return on your investment if you sell the stock 6 monthslater at a price of $77? What is the overall rate of return on yourinvestment if you sell the stock 6 months later at a price of$65. (assume the margin loan (call rate) rate is 8% peryear).

Suppose that Off-Star currently is selling at $60 per share. You buy 100 shares, borrowing the maximum amount of the purchase price from your broker. If the initial margin is 50% and the maintenance margin is 25%, how low can Off-Star's price fall before you get a margin call? Assume the price fall happens immediately.

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