Question

7. If the maintenance margin is 30%, you bought 100 shares of IBM for $100 per share with initial margin 50%, to what price can IBM stock price fall before you will receive a margin call? A. $90.21 B. $78.79 C. $71.43 D. $87.12

Answer 1

Solution:
	Answer is C. $71.43
Working Notes:
	Initial margin = 50%
	Maintenance margin = 30%
	Bought share value = Number of shares x Buying share price
	Bought share value = 100 shares x $100 per share
	Bought share value = $10,000
	Bought with initial margin 50%
	Means only paid = 50% x share value
	Means only paid = 50% x $10,000
	Means only paid = $5,000
	Initial margin =$5,000
	So initial margin 5,000 means Equity 5000 and borrowed is 5000
	But maintenance margin is 30% , so margin call will received only when it price fall below bought price such that its initial margin is 30% or below from present 50% initial margin paid
	Let P the price at which the stock price fall before which we will receive a margin call.
	So
	Maintenance margin = (no of shares x P - Borrowed )/(no of shares x P)
	30% = (100 x P - 5000 )/(100 x P)
	0.30 = (100 P - 5000)/100 P
	30 P = 100 P - 5000
	5000 = 100 P - 30 P
	5000 = 70 P
	P=5000/70
	P=$71.42857
	P=$71.43
	Hence when price reach below $71.43 we will receive margin call as earlier margin paid will fall below 30% so margin will be called , so below $71.43 is the price before we will receive a margin call.
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