Question

Suppose your margin account have $400 in cash. Price of the stock is $10 per share. Earlier bought a stock with 50% margin allowed by your broker, and use full margin. The 50% margin: 80 shares can be purchase and $800 is value of your account after the purchase. Now, suppose the broker issues margin call if margin % fall to 25%. The 25% margin: 160 shares can be purchase, $300 is value of your account after the purchase, and stock price will be $6.67 per share.

How much do you have to send to the broker to bring margin to the required margin?

Answer 1

Once there is a margin call then the account has to be brought back to the initial margin, in this case, it is 50%. The margin call happens at 25% which has to be brought to 50%. The price of the stock at a 25% margin call is $6.67.

The account value @$6.67 will be = (Initial Amount Deposited - number of shares purchased*change in price)

Account value @$6.67 = (400 - 80*(10-6.67)) = $133.6

The amount needs to be added to bring it to 50% will be = 50% of Value - Account Value present

50% of value at current market price = 50%*80*6.67 = 266.8

The amount needs to be added to bring it to 50% will be = 266.8 - 133.6 = $133.2