Question

Jessica has a margin account in which she deposits $300,000 (Equity). Assume that the initial margin requirement is 50% and that the margin maintenance is 15%. Jessica is planning to invest (long) in Ford stock which is currently selling at $40/share. a) Show that Jessica could purchase 15,000 shares, using the maximum allowable margin. b) Assume that the broker charges 5% annual interest rate, assume that the broker's fees are 0.3% of the total amount paid for the purchase and received upon the sale. A year later Jessica receives $1 per share dividend and sells the stock for $45/share. What is the rate of return on her investment? c) Will Jessica receive a margin call if the price of the Ford stock falls during the year to 19$/share? Justify

Answer 1

	No. of Shares	Purchase Price	Total purchase price	Initial Margin @50%	Remarks
A.	15000	40	600,000.00	300000	Equity deposited in account of $300,000 matches initial margin .

B.	Particulars	$
	Sale Value	675,000.00
	Interest (Assumed annual)	(15,000.00)
	Broker Charges	(3,825.00)
	Dividend Received	15,000.00
	Purchase Value	(600,000.00)
	Gains	71,175.00
	Rate of Return on Margin invested	23.73%

C.	No. of Shares	Purchase Price	Total purchase price	Initial Margin MTM @50%	Maintainence Margin @15%	Remarks
	15000	40	600,000.00	300,000.00	90,000.00	Maintainence Margin met as account already has $300,000
	15000	19	285,000.00	(15,000.00)		Decrease in price to $19 will vanish whole of Initial Margin.Now, The value of share prices will be $285,000 and Initial Margin call will be made for additional $285,000*.5 + $15,000 of margin vanished.