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Maintenance Margin

You are bearish on XYZ stock and decide to short 100 shares at the current market price of $50 per share.

How much in cash or securities must you have in your brokerage account if the broker

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Nelly Stracke
Nelly StrackeLv2
29 Sep 2019

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You decide to purchase on margin 1000 shares of ABC stock currently trading at $25 each. Your initial margin is 40% and your broker allows you a buffer of 10% before making a margin call รขย€ย“ i.e., the maintenance margin is 30%.

(a) How much must you invest initially to purchase the shares and what is the amount you borrow from your broker?

(b) How far can share price fall before a margin call is triggered?

(c) Now assume that share price drops to $20. You received a margin call and you decided to deposit T-bills in your account to increase the margin; the deposit will increase the total value of your margin account while NOT changing the value of the loan. That is, the total value of your account will be the sum of the value of 1000 shares and the value of T-bills. What is the total value of T-bills you need to put up, in order to get the margin back up to the maintenance margin of 30%?

(d) If you do not take an action in time your broker will partly liquidate your position and repay the loan in order to (just) meet the maintenance margin requirement. How many shares would the broker sell in order to get the margin back up to the maintenance margin of 30%?

You sell short 300 shares of Microsoft which are currently selling at $30 per share. You post the 50% margin required on the short sale. Your broker requires a 30% maintenance margin. Assume you earn no interest on the funds and ignore any dividends. If you earn no interest on the funds in your margin account what will be your rate of return after one year if Microsoft is selling at $27? (Ignore any dividends).

Dee Trader opens a brokerage account and purchased 300 shares of Internet Dreams at $40 per share. She borrows $4000 from her broker to help pay for the purchase. The interest rate of the loan is 8%.

a. What is the margin in Dee's account when she purchases the stock?

b. If the share price falls to $30 per share by the end of the year, what is the remaining margin in her account? If the maintenance margin requirement is 30%, will she receive a margin call?

c. What is the rate of return on her investment?

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