Explanation:
The correct answer is B ($33.33). Here's why:
Initial Setup: The trader buys the stock at $50 per share with $25 equity and a $25 margin loan (since $50 - $25 = $25).
Margin Call Trigger: A margin call occurs when the equity in the account falls below the maintenance margin requirement (25%).
Calculation: To find the share price (P) where equity equals 25% of the share price:
P - Margin loan ($25).P - $25) / P.P: P = $33.33.Verification: At $33.33, equity is $33.33 - $25 = $8.33, which is 25% of $33.33.
$12.50): Incorrect because equity would be negative ($12.50 - $25 = -$12.50), which is not possible for a margin call.$37.50): Incorrect because it assumes the maintenance margin is applied to the original price, not the current price.Ultimate access to all questions.
A trader purchases a stock on margin with the following details: Purchase price per share is $50, equity per share is $25, and the maintenance margin requirement is 25%. If the share price falls, the highest price at which the trader will receive a margin call is closest to:
A
$12.50.
B
$33.33.
C
$37.50.
No comments yet.