You wish to purchase 105 shares of Nike at $92.25. You have $5,000 of account equity for the purchase.
1- What would be the margin for this purchase?
Suppose your margin account has an initial margin requirement of 50% and a maintenance margin requirement of 40%. Your brokerage firm requires that when you receive a margin call, you must restore your account to the initial margin.
2 - Three months later the price of Nike has declined to $68.85 and you receive a margin call. How much do you need to deposit as a result of the margin call?
3 - What is the critical price where you will receive a margin call?
4 - Suppose instead of depositing the money for the margin call you liquidate the position. If the call money rate plus your broker’s spread is 6%, what is your effective annual return?
5 - Suppose you believe that BP stock will decline due to falling oil prices and decide to short 50 shares of the stock when the price is $38.18. You broker requires an initial margin of 50% and a 40% maintenance margin. Contrary to your hunch, BP stock begins to decline. At what price will you receive a margin call?