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 percent. The stock price at which the margin call will occur is closest to:
A is correct.
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 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.