Margin Call Question his, currently, borrowed, account

robjames1984

John has 50,000 in cash in his margin account. The broker charges 6% on borrowed funds and commision of 3% on both buy and sell trades. Initial margin reqirement = 50% and maintenance margin = 30%. He uses maximum margin to SELL SHORT XYZ stock, currently trading at $34.9. XYZ pays no divdend. If he wants to maximize his margin, what is the max # of shares he could sell short, and what is the trigger margin price.
A) # of shares = 2703 margin trigger = 58.17
B) # of shares = 2703 margin trigger = 40.27
C) # of shares = 2865 margin trigger = 58.17
D) # of shares = 2865 margin trigger = 40.27
I would love the explanation for this problem. Im having problems with these calcluations b/c of SELLING SHORT and not buying long, in which the calculations seem to be str8 forward.

spartanag07

is it D?
Trigger Price = 34.9 * 1.5/1.3 = 40.27
Margin balance = 50,000. Intial margin is 0.5. So he can trade for 50000/0.5 = 100,000.
100,000/34.9 = 2865.

DarienHacker

the answer is B

hassan

Whats the source of question?

ap0258

Stalla. i have the explanation, its just long, ill post it later

jcole21

Back to review Equity for me!!!! Totally missed the commission….

kingstongal

Hey man. Thanks for the answer.
Im still not sure I understand the very last portion:
I get the 141,502 = Initial Cash + Cash from Short Sale  Commission … thats fine
I also get the P(2703) in the denominator as the “MV of the Marginzed Assets”
Its just the amount owed in the numerator of  2703*X that i dont understand. I know that this 2703*X is going to be paid to the owner of the shares at close. But what about the 50% margin that had to be put up with the broker? Should this be included in the calcualtion somewhere?

ayaz_mahmud369

To establish a short position, you borrow the shares from the broker, and sell the shares in the market. You BORROW the shares, those shares are not yours. When you close the position, you’ll have to BUY the shares from the market, and return these shares to the broker you borrowed from.
When the shares are sold, the amount received is deposited in the margin account (not at your disposal). You also have to deposit the initial margin, the 50%. So actually, you’ll have 1.5 times the value of the shares in the margin account (these is where you get the (1+50%)*2703*34.9 = 141,502.05, the 50% is the margin).
As time go by, the position is marked to market each day, so each day, gains or losses are posted to the margin account. For the short position, if the price of the stock goes up, the increase in price would be deducted from the margin account. When all deductions get your margin to less than the 30% (maintenance margin) of the THEN current value of the position, you will receive a call and be required to deposit an amount that would bring the margin back to the maintenance margin (not the initial margin).
The 2703*X is the THEN Current value of the position, this is deducted as if you would, have to buy the shares from the market and return those shares to the broker:
Margin = (Initial margin account– Current value of your position)/ (Current value of your position)
Is this helpful?

bkballa

50000/.53 = 94339.62
1.5/1.3*34.9 = 40.27

hassan

the weird part is that stalla has a different formula.
ive never seen this Margin call/Maintenance call X Price formula anywhere?