# What is the equity in your account after 2 years and would you have received a margin call before the 2-year time period elapsed?

What is the equity in your account after 2 years and would you have received a margin call before the 2-year time period elapsed?.

## margin call

Problem 1

You buy 100 shares of GE in a margin account at \$60 a share

The initial margin is 40%

The cost of borrowing is 5% (from your broker)

The stock pays a dividend of \$1 a share

The minimum maintenance requirement is 20%

1) In 1 year the stock rises to \$80 – what is the percentage return on your investment?

2) Calculate the % return if you had not used margin (cash account)- why are they different?

Given that net worth = Assets (items of value) – Liabilities (things you owe)

3) What would your net worth be if the stock dropped to \$35 in 1 year? Explain what would most likely happen in this scenario.

4) Calculate the price at which you will receive a margin call – base your calculation on the information that is present when you make the purchase – hence at time t=0

Problem 2

You sell short 100 shares of ABC at \$75 a share

The initial margin is 50%

The cost of borrowing money in the margin account in 5%

Ignore cost of borrowing shares

The stock pays a dividend of \$2 a share

The minimum maintenance requirement is 20%

5) Calculate the price at which you will receive a margin call – base your calculation on the information that is present when you initiate the short sale – hence at time t=0

6) In 2 years the stock rises to \$100 a share – what is the annual percentage return on your investment?

7) What is the equity in your account after 2 years and would you have received a margin call before the 2-year time period elapsed? Explain

What is the equity in your account after 2 years and would you have received a margin call before the 2-year time period elapsed? 