Margin Long position: You bought 1000 shares of common for $30 per share on margin. Initial margin = 50% Maintenance margin = 35% Initial MV = 1000*$30.

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Presentation transcript:

Margin Long position: You bought 1000 shares of common for $30 per share on margin. Initial margin = 50% Maintenance margin = 35% Initial MV = 1000*$30 = $30,000 Loan = 30,000 *.5 =$15,000 Initial Equity = 30,000 *.5 = $15,000

If price went up to $40 what is: Your equity? New Equity = new MV – Loan = $40 * ,000= $25,0000 Your profit? Profit = New Equity – Initial equity = 25, ,000 = $10,000 % of margin? Margin% = new equity/ MV = 25000/40,000 =.625

At what price below which you receive margin call?

P= 15000/1000 (1-.35) = $23.08 If price falls to $20: What is your equity? New Equity = new MV – Loan = ,000 = 5000 What is your profit ? Profit = New equity – initial equity = 5000 – = -$10,000 What is your margin? Margin% = equity/ MV = 5000/20,000 =.25

When the price is $20, how much you need to deposit with your broker to restore maintenance margin requirement? Margin % = Equity needed/newMV.35 = Equity/ 20,000 Equity needed = $7,000 Cash requested = equity needed – new equity = 7,000 – 5,000 = $2,000

Margin, Short sell You sell 2000 shares of common stock at $40 per share short. Initial margin is 40%. Maintenance margin is 35%. Initial Equity = 80,000 *.4 = Loan = 80,000 *.6 = 48,000 Initial cash with your broker = proceeds from the sale of stock + initial equity = 80, ,000 = 112,000

How far the price of stock can go up before getting a margin call? P= 112,000/2000(1+.35) = $41.48

If price goes up to $45, What is your new equity? New Equity = Initial cash – new MV New Equity = 112,000 – 90,000 =22,000 What is profit? Profit = New equity – initial equity =22, = -$10,000 What is your new margin? New margin = New equity/ new MV = 22000/90000 =.2444

When the price is $45, how much cash needs to be deposited with your broker to meet maintenance margin requirements? Maintenance margin = equity needed / new MV.35 = equity needed/90000 Equity needed = Cash requested = equity needed – new equity 31,500 – 22,000 = $9,500

If price falls to $30, What is your new equity? New equity = Initial cash – New MV = 112,000 – 60,000 = 52,000 What is your profit? Profit = New equity – initial equity = – = $20,000