Question

You are bullish on Telecom stock. The current market price is $100 per share, and you have $15,000 of your own to invest. You borrow an additional $15,000 from your broker at an interest rate of 8% per year and invest $30,000 in the stock. How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately.

Answer 1

Answer:

Ans. The price has to fall to $71.43 in order to get a margin call on this bullish position.

Explanation:

Hi, you get a margin call when the amount of money that you have equals the maintanace margin. That means, in this case, if the price drops below a certain value, you will have less than the maintenance margin to pay the loan that you made. Since this happens immediately, there is no need to include the interest rate in this calculation. What we need to do is solve for "P" the following equation.

$Main.Marg=\frac{Stocks*P-Loan}{Stocks*P}$

Where:

Stocks: The number of stocks that you bought (own money +loan)

(15,000(Own)+15,000(loan))/$100 PerShare= 300 shares

$0.3=\frac{300*P-15,000}{300*P}$

$90P=300P-15,000$

$15,000=210P$

$\frac{15,000}{210} =P=71.43$

The stock has to drop immediately to $71,43 from $100 (original value) for you to get a margin call.

Best of luck.