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X Corp: Stock price = $70 (purchase of 1,000 shares) 50%: Initial margin . 40%: Maintenance Margin Required (MMR) MV = Borrowed/ (1 - MMR)
X Corp: Stock price = $70 (purchase of 1,000 shares) 50%: Initial margin . 40%: Maintenance Margin Required (MMR) MV = Borrowed/ (1 - MMR) = 35K /(1-0.4) - $58,333 (value of the stock position before getting a margin call) 1,000 shares purchased using 50% of margin Initial Position MV Stock $ 70,000 Borrowed Equity $35,000 $ 35,000 If the stock price falls to $60 per share Equity = Market value - Borrowing = 60,000 - 35,000 = $25,000 . Margin %: $25,000/$60,000 = 41.67% ...margin call? How far can price fall before margin call? New Position Stock MV $60,000 Borrowed Equity $35,000 $25,000 Margin Maintenance - Margin Call If the stock price falls to $45 per share Equity = Market value - Borrowing = 45,000 35,000 = $10,000 Margin %: $10,000/$45,000 = 22% ...margin call? How much additional cash to hold the position? MMR ($) = (MV x Maintenance Margin %) MMR ($) = (45,000 x 0.4) = $18,000 If Equity = 10,000... the investor needs to add $8K (additional cash / funds) New Position MV Stock $45,000 este position $25,000 Borrowed Borrowed Equity $35,000 $10,000 tation. Fabio De Castro 1. Calculate the return on the investment (ROI) for the previous example if the stock price is sold by $80 and $60 one year later. Consider the annual interest of 3% on the borrowing. 2. What is the benefit compared to a purchase of the same stock over the same period of time by not using margin? What is the leveraging effect? Buy at $70 Sell at $80 in 1-year Sell at $60 in 1-year 1. Margin (ROI) 2. No Margin (ROI) Leverage factor X Corp: Stock price = $70 (purchase of 1,000 shares) 50%: Initial margin . 40%: Maintenance Margin Required (MMR) MV = Borrowed/ (1 - MMR) = 35K /(1-0.4) - $58,333 (value of the stock position before getting a margin call) 1,000 shares purchased using 50% of margin Initial Position MV Stock $ 70,000 Borrowed Equity $35,000 $ 35,000 If the stock price falls to $60 per share Equity = Market value - Borrowing = 60,000 - 35,000 = $25,000 . Margin %: $25,000/$60,000 = 41.67% ...margin call? How far can price fall before margin call? New Position Stock MV $60,000 Borrowed Equity $35,000 $25,000 Margin Maintenance - Margin Call If the stock price falls to $45 per share Equity = Market value - Borrowing = 45,000 35,000 = $10,000 Margin %: $10,000/$45,000 = 22% ...margin call? How much additional cash to hold the position? MMR ($) = (MV x Maintenance Margin %) MMR ($) = (45,000 x 0.4) = $18,000 If Equity = 10,000... the investor needs to add $8K (additional cash / funds) New Position MV Stock $45,000 este position $25,000 Borrowed Borrowed Equity $35,000 $10,000 tation. Fabio De Castro 1. Calculate the return on the investment (ROI) for the previous example if the stock price is sold by $80 and $60 one year later. Consider the annual interest of 3% on the borrowing. 2. What is the benefit compared to a purchase of the same stock over the same period of time by not using margin? What is the leveraging effect? Buy at $70 Sell at $80 in 1-year Sell at $60 in 1-year 1. Margin (ROI) 2. No Margin (ROI) Leverage factor
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