Suppose that a stock trader has bought $20,000 worth of securities.He kept $10,000 in an initial margin in his brokerage account and borrowed the rest from his broker.The maintenance margin is 25 percent.The value of the account has fallen to $3,500.The account holder has to come up with a variation margin of:

Question

Quizplus · Accepted Answer

The initial margin is $10,000, so the amount borrowed from the broker is $10,000.

The maintenance margin is 25%, so the value of the securities must be at least $13,333.33 (= 1.25 x $10,666.67) to avoid a margin call.

Since the value of the account has fallen to $3,500, the trader has a deficiency of $10,833.33 (= $13,333.33 - $3,500).

The variation margin that the trader must come up with is equal to the deficiency, which is $10,833.33. However, since the trader has already put up $10,000, he only needs to come up with the remaining $1,833.33 (= $10,833.33 - $10,000).

Therefore, the correct answer is B) $1,500.

Suppose That a Stock Trader Has Bought $20,000 Worth of Securities.He