Q:
Laura
bought 200 shares of GE at $80 on a 70% margin and received
a margin call. Laura's online broker requires a minimum
of 30% coverage. If the request is no longer met, by
what % did GE fall?
A:
  • 80
    + .7 = $56 margin price
  • 80
    - 56 = $24 in debt
  • New
    Low (NL) is [NL - $24 = .3NL] or, 7NL
    = $24 = $34 ¼ = Lowest price to maintain
    30%
  • 34/80
    = about 43%
  • GE
    has to decline by at least 57% to reduce Laura's
    equity low enough to trigger a call.

This
is fairly simple, the only elegant piece is realizing
the purpose of the proportional math in the algebra:
to "tease out" the effect on the equity
vs. debt portion of the investment. This logic appears
ubiquitously throughout financial and investment models.

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