1. All About Margins Economics 71a Spring 2007 Extra

2. Margin Requirements  Margins on longs Calculation Maintenance  Margins on shorts

3. Margins on Longs

4. Example  Buy 100 shares at $10 share, 0.75 margin Total value = 1000 0.75 = (1000-borrowed)/1000 Borrowed = 250  Price falls to $5 share Total value = 500 margin = (500-250)/500 = 0.50

5. Maintenance Margin  As prices fall, broker investors are worse off  Broker worries about whether they can pay off loans  Maintenance margin = margin where broker forces investor to come up with more money  Hitting this is known as a “margin call”

6. Example  Buy 100 shares at $10 share, 0.75 margin Total value = 1000 0.75 = (1000-borrowed)/1000 Borrowed = 250  Maintenance margin = 0.25 0.25=(p*100-250)/p*100 Solve for p, p =