Question

You purchase 500 shares of Johns Incorporated at $50 per share using an initial margin of 60%. Your maintenance margin is 25% and the minimum initial margin is 50%.

A.   How low can the stock price fall before you receive a margin call?

B.   If the stock price falls to $21 a share, how much additional equity must you add to your account?

Answer 1

value of long position = number of shares * buying price

=500*50

=25000

Equity amount invested for intital margin 60% =25000*60% =15000

minimum initial margin is to be maintained all time 50% = 25000*50% = 12500

maintenance margin 25% =25000*25% = 6250

If margin balance goes below maintenance margin, then margin call is made to make balance upto mimum initial margin.

Price to make margin call for long contract = long  price of contract + (initial margin - maintenance margin)/number of shares

=50 -((12500-6250)/500)

=37.5

So stock price can fall upto $37.5 before margin call is made.

b.

closing price of contract or sale price of contract to cut long position = $21

Profit or loss on position = ((selling price - buying price)*number of shares)

=(21-50)*500

=-14500

Margin balance = Initial equity +-profit or loss

=15000-14500

=500

Margin call made = initial margin minium - balance

=12500-500

=$12000

So additional equity added to account would be $12000