Margin = Equity / Value of Asset 100 shares @ Rs.

@ Rs. 100/Loan from Broker Equity Initial % Margin: = = = 10000/= 4000/= 6000/6000 / 10000 0.6

 Stock Price becomes: 70/Value of Asset: 70 * 100 = 7000 Loan: 4000/- Equity: 3000/Margin: 3000 / 7000 = 0.43

When stock value becomes 4000/-, owners equity is Zero

Maintenance Margin: Broker fixes a min margin requirement. Below this threshold, he calls for more equity from the customer. If MM = 30% % Margin = Equity / Asset Value = 0.3

 At what price would a broker give a margin call? Equity: 100P 4000 Value of Asset = 100P

(100P 4000) / 100P P = 57.14

0.3

Suppose Maintenance Margin = 40%. At what price would the broker give a margin call?

(100P-4000) / 100P = 0.4 P = 66.66 Why buy on Margin? IBM = 100/- per share. Expect price to go up by 30%; Interest on Margin Loan: 9% No dividend. HPR = HPY = 30% Buy at 50% Margin. This means you are taking 10000/- loan, and investing 10000/- own money. Equity: 10000; Asset Value: 200@100/- = 20000/Margin: 20000 10000(bm) / 20000 = 0.5

If the price reaches 130/Profit = {(26000 10000-900) 10000} / 10000 = 0.51 = 51% If the price goes down by 30% Profit = {(14000 10000 900) 10000} / 1000 = (3100 10000) / 10000 = -0.69 = 69% loss If theres no change in prices: Loss = ________ If you borrow only 5000/-

What is the profit if the share went up by 30% What is the loss if it goes down by 30% 40.5, -49.5

 Short Sales: Borrow shares from a broker and sell the same before owning the share. What is the diff between margin purchases and short sales?

Dot Bomb Share: 100/You feel that it is overvalued and are shorting it by selling 1000 shares. Broker has a margin requirement on short sale of 50% This means you need to have 50000/- equity in your account.

Assets:

Cash: 100000/Bonds: 50000/Liabilities Short Position: 100000/Equity 50000/% Margin: Equity / Asset Value 50000 / 100000 = 0.50

Price goes down by 30% Value of share: 70/Close the short position at a profit Buy 1000 shares from the market and give to broker. Cost = 70000/- Profit = 30000/Price goes up by 30% Value of share: 130/Broker has a MM of 30% on short sales. MM = Equity / Asset Value = 0.3 Will you get a margin Call? At what price will that happen?

Equity = 150000 Value of share = 150000 1000P Asset Value = 1000P (150000 1000P) / 1000P = 0.3 P = 115.38 If Short Margin is 40%, how far the price can rise before you get a margin call?

Equity / Asset Value = 0.4 ( 150000 1000P) / 1000P = 0.4 P = 107.14