A trader buys 500 shares of a stock on margin at $36 a share using an initial leverage ratio of 1.66. The maintenance margin requirement for the position is 30%. The stock price at which the margin call will occur is closestto:
Initial equity (%) in the margin transaction = 1/Leverage ratio = 1/1.66 = 0.60;
Initial equity per share at the time of purchase = $36×0.60 = $21.60;
Price (P) at which margin call occurs:
Equity per share/Price per share = Maintenance margin (%)
= ( $21.60 + P-$36)/P = 0.30;
0.7P = $14.40;
P = $20.57