You have just purchased 100 shares of Ford Motor at 70 per s

You have just purchased 100 shares of Ford Motor at $70 per share on margin. The initial margin requirement is 60 percent. The maintenance margin is 30 percent. If the stock price falls to $30, how much cash do you have to add to your margin account if you do not retire the debt?

Select one:

a. $1,200

b. $1,105

c. $1,009

d. $1,000

Solution

Initial Price of the security: $70 * 100 = $7000

Initial Margin Requirement: $7000 * 0.6 = $4200

Amount of borrowed funds: $7000 - $4200 = $2800

Mantenance Margin Requirement = 30%

New Stock Price: $30

Current market value of securities: $30 * 100 = $3000

Value of equity left = $3000 - $2800 = $200 [Market Value of securities - Value of borrowed funds]

Value of equity left in percentage = ($200 / $3000) * 100 = 6.67%, so this requires a margin call.

Cash to be added to margin account = Current market value of securities * maintenance margin - Value of Equity Left

= 3000 * 0.3 - 200 = $700

We need to add $700 of cash to margin account. Out of the options given, the closest value to $700 is $1000.
Therefore option (d) is correct choice.