1.You just bought 200 shares of a stock priced at $45 per share using 50% initia
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Question
1.You just bought 200 shares of a stock priced at $45 per share using 50% initial margin. The broker charges 5% annual interest rate on the margin loan and requires a 30% maintenance margin. One year later stock price dropped to 29 and you recieved margin call, to restore your margin to the initial margin level, how much would you need to deposit?
2.You short-sell 200 shares of Tommy co. now selling for $37 per share. If you wish to limit your loss to $1,450, you should place a stop-buy order at what price?
3.You purchased 250 shares of common stock on margin for $50 per share. The initial margin is 65% and the stock pays no dividend. Your rate of return would be how much if you sell the stock at $35 per share. Ignore interest on margin.
Explanation / Answer
1. Total equity value =45 X 200 =9000 USD
50% initial margin =0.5 X 200 X 45 =4500 USD
The brokerage firm will loan you 4500 USD
The price below which you may recieve margin call is
45 (1-0.5) /(1-0.3) =32.14 USD per share
Total equity value needed to avoid margin call = 32.14 X 200 =6428.6 USD
Equity value at 29 USD is 29 X 200 =5800 USD
So when we recieve margin call, we need to deposit 6428.6 -5800 =628.6 USD
2.Short selling 200 shares at 37 per share which mean transactional value =7400 USD
I ned to limit my loss to 1450 USD. SO i need to purchase shares at most worth 7400+1450 = 8850 USD to stop loss.
So stop-buy order should be at 8850/200 =44.25 USD per share
3.The total buying price = 250 X 50 =12500
Initial margin = 65%.
It means I have borrowed 35% of equity value which is 0.35 X 250 X 50 = 4375 USD and have invested 0.65 X 250 X 50 =8125 USD
Selling price = 35 X250 = 8750 USD.
The overall loss in transaction is 8750- 12500 = -3750
The rate of return is -3750/8125 X 100 = -46.15%
You are losing 46.15% percent of your investment
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