Question

You have a Margecan Assume you put up 56,000 and boerew the rest 10 P PF shares $10 What is the Margint b. How would this be represented in the balance sheet PFE c. Now assume that your margin account requires a maintenance margin of 30% selling for $40, would you receive a margin call? Why? d. Ir the Price increases to $95 per share, what is the new margi! Will you be having margin call or not? Why?

Answer 1

Part a.

Margin= Total value of position - own equity

= 150*70 - 6000

=10500 - 6000

= $4500

Part b.

balance sheet:

Assets		Liabilities & Account Equity
150 shares Pfizer	$10,500	Margin Loan	$4,500
		Account Equity	$6,000
Total	$10,500	Total	$10,500

Part c.

At $40, value of 150 shares = 150*40= $6000

But out of this, $4500 is the margin amount initially borrowed, so account equity remaining = $1500

Since this is less than $2000 ( i.e. 30% of current value of 150 shares) so we will get a margin call as there is a shortfall of $500.

Part d.

If price increases to $95, the new value of 150 shares =150*95

=$14,250

So, account equity =$14,250-$4,500

=$9,750

Since this is more than 30% of $14,250 so we will not get a margin call