Question

As an investor in the financial market, you have two situations that you can make a profit out of. Currently, the stock price is $30 per share. Identify the best strategy to follow for each case. (Assume 1000 shares for each case)

When you expect that the price of BETA will increase in 30 days to $40. The broker’s initial margin requirement is 60% of the value of the position. - What will be your strategy and your position? - How much will you lose or gain if you closed your position after 30 days? - Do you receive a call if the price will be $50 per share? - What should be the price of the stock for you to receive a margin call? the maintenance margin is 25%.

Answer 1

The initial investment will be $ 30 x 1000 = $ 30,000. With 60% initial margin, the investment will be 30,000 x 60% = $ 18,000

The best strategy if there is an upmove expected is to take a LONG position i.e. to buy the stock. If the stock price is expected to go to $ 40 after a month , the profit will be $ 10 x 1000 = $ 10,000.

Need for margin call:

If the stock price goes to $ 40 , there will be no further margin call, as the investor will be in a profit. Thus, current margin paid is enough.

If the stock price goes to $ 50, there will be again no further margin call, as the investor's expected profit will be now even higher at $ 20,000

Amount for margin call:

Maintenance Margin = 25%

The margin kept is $ 18,000 on Day 0

There will be a margin call if the stock value erodes below such a price that the $ 18k is below 25% of the investment. As the current investment is only 30 k, there will be no margin call.

Margin call if only happen if the value erodes below 18k x 1/25% = 72K