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ABC Corporation is a start-up company that went public in January 2024. Its IPO was initially priced at £50 per share, but by March 2024 its price reached £70 per share. Assume you have £10,000 to invest and the initial margin requirement is 50% of total funds. You decide to buy on margin at the current price of £70 per share. The maintenance margin call is set at 30%.Question: After the short sale, the share price rises to £85 per share. Compute your new equity value and determine whether you will receive a margin call. I need process thank

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Answer to a math question ABC Corporation is a start-up company that went public in January 2024. Its IPO was initially priced at £50 per share, but by March 2024 its price reached £70 per share. Assume you have £10,000 to invest and the initial margin requirement is 50% of total funds. You decide to buy on margin at the current price of £70 per share. The maintenance margin call is set at 30%.Question: After the short sale, the share price rises to £85 per share. Compute your new equity value and determine whether you will receive a margin call. I need process thank

Expert avatar
Frederik
4.6
101 Answers
Given:
Initial price per share = £70
Initial margin requirement = 50%
Maintenance margin requirement = 30%
Initial investment = £10,000

1. Calculate the number of shares purchased:
Total funds available = Initial investment/(Initial margin requirement) = £10,000 / 0.5 = £20,000
Number of shares purchased = Total funds available / Share price = £20,000 / £70 ≈ 285.71 shares (rounded to 2 decimal places)

2. Calculate the initial equity value:
Equity value = Total funds available - Loan = Total funds available - (Total funds available * Initial margin requirement) = £20,000 - £10,000 = £10,000

3. Determine the new total value after the share price rises to £85:
New total value = Number of shares * New share price = 285.71 * £85 ≈ £24,285.35

4. Calculate the new equity value:
New equity value = New total value - Loan = New total value - (Total funds available * Initial margin requirement) = £24,285.35 - £10,000 ≈ £14,285.35

5. Determine if there will be a margin call:
To determine if there is a margin call, we compare the new equity value with the maintenance margin requirement. If the new equity value is less than 30% of the new total value, a margin call will occur.

New equity percentage = (New total value - Loan) / New total value * 100
New equity percentage = £14,285.35 / £24,285.35 * 100 ≈ 58.78%

Since the new equity value percentage is above the maintenance margin requirement of 30%, there will be no margin call.

Therefore, \boxed{\text{New equity value is £14,285.35 and there will be no margin call.}}

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