Question

You are in a dinner talking with friends about investing in Netlfix. You are bullish in the stock while your friends are negative. You decide to do a margin purchase on the 1st of May 2019. The price is 380$ per stock and you want to buy 1,000 shares. You decide to purchase on margin as you are very optimistic on this trade. You call your broker and she gives you the following info on the account:

• Initial Margin Requirement: 50%

• Maintenance Margin 20%

• Annual Rate on margin purchases is 7.50%

• Commission was a flat fee of 40 $ per operation in the stock market

1. At what stock price will you receive a margin call?

2. August 31st you decide to close your position and sell the stock at 300$.

   The stock gave no dividend. What is the return of your investment? What would have been the total return if you had bought the stocks without borrowing?

3. Your other friend decided to short at the same time as you did, if requirements for Initial Margin and Maintenance Margin were the same, what was the total return of his investment?

theres no more information available. that id the whole question

Answer 1

Solution
	Current stock price of Netflix	$ 380
	No of Shares	1000
	Total amount required to buy the shares outright	380000
	Margin purchase date	01.05.2019
	Position close date	31.08.2019
	Initial margin	50%
	Maintenance margin	20%
	APR on Margin trading	7.50%
	Commission	$40/operation
	Amount needed for margin purchase for 1000 shares (380000*50%)	190000
	Commission per operation	40
	Amount needed to purchase on margin (190000+40)	190040
	Price of Netflix on 31.08.2019	$300
	Sale proceeds of 1000 shares	=300*1000
		=300000
A)	Margin Trade-Call
	Interest on Margin Loan	=190000*7.5%*4/12
		=4750
	Commission on position close operation	=40
	Net proceeds received	=Sale proceeds-Margin Loan-Interest on Margin Loan-Commission
		=300000-190000-4750-40
		=105210
	Return on investment with Margin	=(Net Proceeds-Initial cost)/Initial cost
		=(105210-190040)/190040
		=84830/190040
		=-44.64%
B)	No Margin Trade-Call
	Commission on sale operation	=40
	Gross proceeds received	=300*1000
		=300000
	Net proceeds received	=Gross proceeds-Commission
		=300000-40
		=299960
	Initial Cost including commission	=380000+40
		=380040
	Return on investment with no borrowing	=(Net Proceeds-Initial cost)/Initial cost
		=(299960-380040)/380040
		=-80080/380040
		=-21.07%
C)	Margin Trade-Long Position
	Initial Margin requirement	=380000*50%
		=190000
	Commission on purchase of short position	=40
	Initial investment	=190000+40
	Gross amount due on closure of short position	=300*1000
		=300000
	Commission on closure of short position	=40
	Interest on Margin Loan	=190000*7.5%*4/12
		=4750
	Net amount payable on closure	=Closure liability-Margin deposit+Interest on Margin Loan+Commission
		=300000-190000+4750+40
		=114790
	Amount receivable from the broker	=190000-114790
		=75210
	Return on investment with Margin (Short Position)	=Initial investment-Amount Payable)/Initial invetment
		=(190000-114790)/190040
		=75210/190040
		=39.58%