CFA Level 1 Margin Call Calculation

Calculating Margin Call for Alba and Lubis

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Question

Using the following assumptions, calculate the stock price at which investors Helen Alba, who shorts the stock on margin, and Kobin Lubis, who purchases the stock on margin, will receive a margin call.

Which of the following choices is closest to the correct answer? Alba will receive a margin call at a stock price of:

Answers

A. $33.00 and Lubis will receive a margin call at a stock price of $37.66.

B. $33.00 and Lubis will receive a margin call at a stock price of $53.45.

C. $46.85 and Lubis will receive a margin call at a stock price of $33.00.

D. $37.66 and Lubis will receive a margin call at a stock price of $53.45.

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Explanations

Click on the arrows to vote for the correct answer

A. B. C. D.

Calculations are as follows:

Since Alba is short(sold the stock), the formula for the margin call price is:

Margin Call = (original price) * (1 + initial margin) / (1 + maintenance margin)

= $42 * (1 + 0.45) / (1 + 0.30) =$46.85

Since Lubis is long(purchased the stock), the formula for the margin call price is:

Margin Call = (original price) * (1 "" initial margin) / (1 "" maintenance margin)

= $42 * (1 "" 0.45) / (1 "" 0.30) =$33.00

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