You purchased 100 shares of KLM at $60 a share by depositing the minimum amount of margin.If the initial margin requirement was 50% and the maintenance margin requirement is 30%,you will get a margin call if KLM's price falls to
A)$18.
B)$20.
C)$43.
D)$40.

Question

Quizplus · Accepted Answer

The total cost of purchasing 100 shares of KLM at $60 a share is $6,000 (100 x $60). If the initial margin requirement was 50%, then the initial margin would be $3,000 (50% of $6,000) and the investor would have deposited this amount.

The maintenance margin requirement is 30%, so the investor's equity in the investment must not fall below 30% of the total value of the investment.

To calculate the margin call price, we need to find the stock price at which the investor's equity falls below the maintenance margin requirement. Let's call this price P.

At the margin call price P, the equity in the investment will be:

Equity = Total Value of Investment - Loan Amount
Equity = 100 x P - $3,000

We know that the equity must be equal to or greater than 30% of the total value of the investment:

Equity >= 0.3 x Total Value of Investment
100P - $3,000 >= 0.3 x (100 x $60)
100P - $3,000 >= $1,800
100P >= $4,800
P >= $48

Therefore, the investor will get a margin call if KLM's price falls to $48 or below. The only option that falls within this range is C) $43.

You Purchased 100 Shares of KLM at $60 a Share