For all problems below assume the initial margin is 45 and t

For all problems below, assume the initial margin is 45% and the maintenance margin is 35% and restoration margin is 40%

You purchased 500 shares of GLM stock today @$80/share on 45% margin. After you purchased the stock, the stock price drops to $55. Will a margin call be made? If the margin call is made, you plan to restore the margin to a level of 40% by selling some shares. How many shares will you need to sell? 4.

Solution

Calculation of price below which a margin call will be initiated:

= share price (1 - initial margin) / 1- maintenance margin)

= 80 (1 - 0.45) / ( 1-0.35)

= 80 (0.55)/(0.65)

= 67.6923

When GLM stock price drop below $67.6923 a margin call will be made.

Here, the stock price drops to $55 so a margin call will be made.

Initial value of stock = 500 * 80 = $40000

Initial Margin = 40000 *45% = $18000

borrowed amount from broker = $40000 - $18000 = $22000

Maintenance margin = 40000*35% = 14000

Now price dropped to $55,

current value of stock = 500 *55 = $27500

now we want to restore margin to 40%,

current value of margin account = $27500

portion of broker = $22000

Actual value of margin accout = $27500 - $22000 = $5500

Amount we wish to maintain = 27500 * 40% = $11000

Difference = $11000 - $5500 = $5500

so, we need to sell $5500 worth of stock,

current price of stock = $55
so, number of stock need to be sold = $5500/$55 = 100