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Margin Calls
  • Initial margin is the initial amount the investor can borrow.
     
  • Maintenance margin is the amount an investor needs to maintain after the trade has been done.
     
  • Margin call triggers prices.
     
  • Margin Purchase = P0*(1 - Initial margin %) / (1 - Maintenance margin %).
     
  • Short Sell = P0*(1 + Initial margin %) / (1 + Maintenance margin %).

    Question: 

    Assume you bought a stock for $20 per share. If the initial margin requirement is 60% & the maintenance margin requirement is 20%, at which price will you get a margin call? 

    Ans: $20 (1 - 0.6) / (1 - 0.2) = $10
 




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