Maintenance margin

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mwvt9

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When buying a position on margin the trigger price for a margin call would be:

Trigger price (margin purchase)=Po(1-initial margin/1-maintenance margin)

If an investor puts up 70% of the initial value of the position instead of the 50% required by Regs, the numerator is 1-.70 correct?

This has to be correct, but I don't want to make a stupid error.
 
your parenthesis are funny.

trigger for a long = { P0(1-initial) }/ (1-maintenance)

so if you have a $50 stock with a 50% initial and 25% maintenance-

50(.5)/.75 = 33.3333 is your px that triggers a call.

walk it through w/ 100 shrs- you pay $5000 for stock, you put up $2500.
now stock goes to 33.33, so it's worth 3333.33. $5k - 3333.33 = $1667 lost. take that from your $2500, you're left with $833.33 of equity, which is exactly 25% of your $3333.33 market value, which is your trigger price for the call.

short side is same thing but with + signs.
 
For what it's worth, I have "IM" stuck in my head for that. As in AOL instant messenger. Helps me remember that the "I" is the numerator.
 
The parentesis shouldn't matter. It would be the same either way.

50((1-.5)/(1-.25))=33.3333

Right. I understand your example. My question is if we put up more than the 50% that we are required to put up does the numerator change? So if we put up 70% of the initially then it would be:

trigger for a long = { P0(1-initial) }/ (1-maintenance)

50(1-.7)/(1-.25) = 20.00 is your px that triggers a call.

Has to be right. It wouldn't make sense if it didn't.
 
Young_Prof Wrote:
-------------------------------------------------------
> For what it's worth, I have "IM" stuck in my head
> for that. As in AOL instant messenger. Helps me
> remember that the "I" is the numerator.

Good tip.
 
mwvt- yes, you're right.
best way to remind yourself that- say you bought it on cash and not margin.

50(1-1) for the numerator = 0... which would be right b/c if you paid for it in full, it can go to zero and you don't get a margin call since it's fully paid for. I doubt they'll say 50% initial but you post 70%, maintenance is 25%, what's the call px... but I guess they could, sure. you understand it, you're good on it.
 
My tip for this is that for the long position it's a "-" (1-Initial) and for the short it's a "+" (1+initial), I remember this as the opposite of how you would think of those two positions.
 
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