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Answer: 25%.
**Step-by-step explanation:** 1. **Understanding the given information:** - Purchase price = €50 - Leverage ratio = 2.5 - Margin call price = €40 2. **Calculate initial margin requirement:** Leverage ratio = Total investment / Equity investment 2.5 = Total investment / Equity investment Let equity = E, then total investment = 2.5E Since total investment = €50 (purchase price), we have: 2.5E = €50 E = €50 / 2.5 = €20 Initial margin = Equity / Total investment = €20 / €50 = 40% So initial margin requirement is 40%. 3. **Calculate maintenance margin requirement:** At margin call price of €40, the equity value is: Equity = Market value - Loan amount Loan amount = Total investment - Initial equity = €50 - €20 = €30 At price €40: Market value = €40 Equity = €40 - €30 = €10 Maintenance margin = Equity / Market value = €10 / €40 = 0.25 = 25% 4. **Verification:** - Initial margin: 40% - Maintenance margin: 25% - Margin call occurs when price drops to €40, which gives equity of €10 (25% of €40) **Therefore, the maintenance margin requirement is 25%, which corresponds to option B.**
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An analyst gathers the following information about a stock purchased on margin:
| Purchase price of stock | €50 |
|---|---|
| Leverage ratio | 2.5 |
| Price below which first margin call received | €40 |
The maintenance margin requirement is:
A
20%.
B
25%.
C
40%.
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