Question

Suppose the initial margin as established by Stock Market Regulators is 35%. The maintenance margin is 20%. Suppose that you have $15,000 in cash that you wish to invest in stock SYPHAX which currently sells for $60 per share. This stock does not pay dividends.

1. If you buy on margin, what is the maximum number of shares that you can purchase? Draw an assets-liabilities table for this transaction.  

2. Ignoring interest expenses, at what stock price will you get a margin call?

3. Suppose that the stock price actually goes down to $45 per share over a one-year holding period.

3.1. Calculate the actual margin.

3.2. Draw the assets-liabilities table in this case. Explain and show to fix the margin account to the initial margin level. What is the return on your strategy?

Answer 1

1. Investor can buy 454 shares of SYPHAX which currently sells for $60 per share.

Total value of shares = $60*454 = $27240

As per margin requirement he has to deposit 35% as initial margin and 20% as maintenance margin

total 55% of $27240 as margin

=$27240*55%

=$14982

So leverage for this position is $12258

Based on this transaction investor Asset-liabilities is as follows

Liabilities	Amount (in $)	Assets	Amount (in $)
Debt	12258	Shares	27240
Equity	14982
Total liabilities	27240	Total Assets	27240

2. Maintenance margin requirement is 20% so for this transaction it will be $5448 (27240*20%)

He will get margin call when stock reaches at $48.

Calculation - Margin amount / Number of shares

=$5448/454

=$12

So $60-$12 = $48

He will get margin call when stock reaches at $48.

3. When stock price goes down to $45

3.1 Total value of position is $20430 ($45*454)

Actual Margin requirement will be $11237 ($20430 * 55%)

3.2 Assets-liabilities table is as follows

Liabilities	Amount (in $)	Assets	Amount (in $)
Debt	9193	Shares	20430
Equity	11237
Total liabilities	20430	Total Assets	20430

If only initial margin is required i.e 35% then for this transaction $7150 and leveraged position will be $13280

Based on investors strategy, he has suffered loss of $6810 which is 45% loss on his initial investment of $14982.