Fins2624 - portfolio management help! (1 Viewer)

[studymon]

Im having a bit of a difficulty understanding why this question is calculated as such...ive found the answer, but i dont understand the formula.

Here is the question:

Assume you sold short 100 shares of common stock at $50 per share. The initial margin is 60%. What would be the maintanence margin if a margin call is made at a stock price of $60?

The answer is 33%



I used the following formula:

[Price of stock * (1 + initial margin) - margin call] / margin call = maintanence margin.



My question is: Why do you add the initial margin in the nominator?


hope that someone can help me out with this,
studymon

 

[sunjet]

the maintenance margin is usually a percentage of the initial margin due to the fact that if price moves against the margin immediately then the investor isn't required to pay a margin call (at time 0 pretty much)

 

[seremify007]

Wow 2624 has really changed alot this sem with a new lecturer!

 

[wrong_turn]

this semester it seems it is actually examining you on the material taught =)