Question of the Week

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?

Answer:
  • 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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