Question

James purchased 500 shares of Ford Motors stock trading at 40$ per share. Assume that James' account has an initial margin requirement of 60 percent. Moreover, suppose James' broker requires a maintenance margin of 30 percent.

Calculate the price at which James will receive a margin call

Answer 1

James purchased 500 shares at a market price = $40 per share

His initial margin requirement = 60%

So he has to pay initially = 60%*500*40 = $12000

His broker gives a margin call at 30%

Let at price X margin call happens

The accccount balance reduces by $500 due to a fall in $1 in current market price i.e. at $39. So at X price the account balance will reduce by 500(40-X)

Account balance at market price X = (12000 - 500*(40-X))

Margin at X will be = Account balance at X price/500*X

=> Margin % = 30% = (12000 - 500*(40-X))/500*X

=> X = $22.857

So James will get a margin call when price falls below $22.857