
Explanation:
The correct answer is A.
The initial margin requirement is 60%, which means the investor must put up 60% of the purchase price as initial margin. The purchase price is $80 per share, so the total cost of the purchase is 100 shares × $80 = $8,000. Therefore, the initial margin required is 60% × $8,000 = $4,800.
When the stock price drops to $50 per share, the market value of the shares is 100 shares × $50 = $5,000. The current equity in the investment is equal to the market value of the shares minus the amount borrowed, which is $5,000 − 0.40 × $8,000 = $1,800.
The maintenance margin requirement is 40%, which means the investor must maintain equity of at least 40% of the market value of the shares. The minimum equity required to avoid a margin call is 40% × $5,000 = $2,000.
Since the current equity is only $1,800, the investor must deposit additional cash to meet the minimum equity requirement. The minimum amount of cash the investor must deposit is the difference between the minimum equity requirement and the current equity, which is $2,000 − $1,800 = $200.
Q.5354 An investor buys 100 shares of a stock on margin, with an initial margin requirement of 60% and a maintenance margin requirement of 40%. The purchase price is $80 per share. After a few days, the stock price drops to $50 per share. What is the minimum amount of cash the investor must deposit to meet a margin call?
A
$200
B
$900
C
$250
D
$1,800
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