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25 September, 14:18

On December 30, 2001, you decided to bet on the January effect, a well-known empirical regularity in the stock market. On that day, you bought 400 shares of Microsoft on margin at the price of $149 per share. The initial margin requirement is 55% and the maintenance margin is 30%. The annual cost of the margin loan is 4%. (a) Determine your initial margin requirement. (b) To what price must Microsoft fall for you to receive a margin call

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  1. 25 September, 14:50
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    a). Total share amount = number of shares bought*price per share = 400 x 149 = 59,600

    Initial margin requirement = 55% x 59,600 = 32,780 (This is the equity which you put up. The remainder will be the loan which the brokerage gives you.)

    b). Loan amount = Total amount - equity = 59,600 - 32,780 = 26,820

    Let the price at which margin call is received be P. Then,

    (Market value of shares - loan amount) / market value of shares = maintenance margin

    (400P - 26,820) / 400P = 30%

    280P = 26,820

    P = 95.79

    When the share price falls below this price, you will receive a margin call.
  2. 25 September, 15:44
    0
    a) initial margin requirement is 32,780

    b) Microsoft fall for you to receive a margin call at 95.79 price

    Explanation:

    a). Total share amount = number of shares bought*price per share

    = 400 x 149

    = 59,600

    Initial margin requirement = 55% x 59,600

    = 32,780

    (This is the equity which you put up. The remainder will be the loan which the brokerage gives you.)

    b). Loan amount = Total amount - equity = 59,600 - 32,780 = 26,820

    Let the price at which margin call is received be P. Then,

    (Market value of shares - loan amount) / market value of shares = maintenance margin

    (400P - 26,820) / 400P = 30%

    280P = 26,820

    P = 95.79

    When the share price falls below this price, you will receive a margin call.
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