You\'ve borrowed $23,500 on margin to buy shares in Disney, which is now selling

Question

You've borrowed $23,500 on margin to buy shares in Disney, which is now selling at $47 per share. Your account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price falls to $41.00 per share.

-

What is the percentage margin on the above transaction

How low can the price of Disney shares fall before you receive a margin call?

What is the percentage margin on the above transaction

How low can the price of Disney shares fall before you receive a margin call?

Explanation / Answer

Value of loan = $23,500

Initial margin = 50%

Initial Margin is 50% mean remaining 50% you have borrowed which is $23,500.

Total Value of investment = $23,500 / 50%

                                           = $47,000

Stock price = $47

So for purchase of 1 stock you have invested $23.50 from your own fund and remaining 50% from borrowed.

2 days later stock price become = $41

So margin remaining because of fall in stock price

= ($41 / $47) – 50%

=37.23%

Hence, percentage margin from transaction is 37.23%.

Maintenance margin = 35%

So value of stock at which margin call will be make

= $47 × (50% + 35%)

= $39.95

So if stock price become below $39.95 then you will get Margin call.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.