Question

The price (P'), below which a maintenance margin call will be issued, can be expressed without the amount borrowed (B) Develop and explain this formula.

Answer 1

Answer

Maintenance margin call

M​​​​​aintenance margin  is the minimum amount of equity that must be maintained in a margin account.

With a margin account, one is able to borrow money from your broker to purchase stocks or other trading instruments. Once a margin account has been approved and funded, one is able to borrow up to a certain percentage of the purchase price of the transaction. one can enter larger positions than one  would normally be able to with cash; by trading with borrowed funds ,just because of leverage offered .Therefore, trading on margin can magnify both wins and losses. However, just as with any loan, you must repay money lent to one by brokerage.

Margin call occurs if account falls below the maintenance margin amount. Margin call is a demand from brokerage for to add money to account or close out positions to bring account back to the required level. If you are do not meet the margin call, your brokerage firm can close out any open positions in order to bring the account back up to the minimum value. Your brokerage firm can do this without your approval and can choose which position to liquidate.

For example

, if one have $5,00 cash in a margin-approved brokerage account, one could buy up to $1000 worth of marginable stock—you would pay 50% of the purchase price and your brokerage firm would loan you the other 50%.

Similarly, one. can often borrow against the marginable stocks, bonds and mutual funds already in account. For example, if one have $5,00 worth of marginable stocks in account and one haven’t yet borrowed against them, one can purchase another $500 the stock you already own provides the collateral for the first $250 and the newly purchased marginable stock provides the collateral for the second $250. You now have $1000 worth of stock in your account at a 50% loan value, with no additional cash outlay.

Because margin uses the value of marginable securities as collateral, the amount one can borrow fluctuates day to day along with the value of the marginable securities in portfolio. If portfolio goes up, your buying power increases. If portfolio falls in value, buying power decreases.