CFA CFA Level 1 Maintenance Margin Question L1

# Maintenance Margin Question L1

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• mvibs
Participant
• CFA Level 1
0

I understand the equation for when a margin call happens.  I am trying to understand the underlying activity though.

Initial Margin Requirement: 50%, Maintenance Margin 25%, Share Price \$40.00 and Number of Shares: 100  (Assume no cost for borrowing or transaction costs)

1) Investor gives broker \$2000, Investment is worth \$4,000.
2) If share price falls to 26.67 (Margin Call Price), Investment is worth \$2,667 (25% is 667, so you need to have \$667 in your account, the investor is now down 1333, broker down nothing)
3) If share price falls to \$12, then the investment is worth \$1200.00

Does this mean that the investor will only have to deposit \$300.00 into the account?  Total investment is worth 1200 + 300 Maint Margin, then the broker only has claims to 1500 as opposed to the 2000 that it loaned.  Is this the correct understanding?  This seems backwards, I would think the broker would require 800 in the account as opposed to 300.

Or does this mean, that the investor needs to pay in 1100, 800 to make the broker whole, and 300 to satisfy the maintenance margin?

4) If Maint Margin is 25% after the initial purchase, if share price remains at \$40, can the investor remove 1000.00 so that the amount in the margin account is only 1000?

Essentially, what determines the amount that needs to be paid in when the margin call happens.  If it drops more, it seems like less needs to be paid in, that seems counter intuitive to me.

• mvibs
Participant
• CFA Level 1
3

Solved: Pay back broker losses first, then 25% of investment Value.