Initial margin requirement formula

Each type of investment has a different initial margin requirement.

Margin trading can take your regular investment strategies up to the next level. They can also take your potential losses to the next level. Working on leverage,they entail borrowing some of the money to stake your initial claim from your broker. You still must pay the rest of the cash back if your trade goes belly up,plus interest. The Securities and Exchange Commission and Financial Industry Regulatory Authority,Inc. set margin requirements,which differ by security and strategy.

Step 1

Start with the minimum margin requirement. FINRA and all securities exchanges require you to deposit $2, 000 or 100 percent of the purchase price of the securities in your account before your broker will grant margin trading privileges. Day traders' minimum deposit is $25, 000.

Step 2

Multiply the purchase price of equity investments by the standard 50 percent initial margin requirement. If your initial investment is more than $4, 000,you'll need to add to the minimum margin deposit. If you buy $10, 000 worth of Apple on margin,your broker will need at least $5, 000 in your account. Each broker can require a higher minimum margin than FINRA rules,and the exact requirements will be stated on your margin account agreement.

Step 3

Invest in options and you'll need to do more calculations. Long (buy) contracts with more than 9 months to the exercise date require a 75 percent margin on the value of underlying securities. Short (sell) options contracts require 20 percent of the underlying index value for narrow equity (single sector) indexes and 15 percent of the underlying value for broad-based equities like S&P500 or Wilshire 5, 000. Out-of-the-money-options,which would produce a loss if exercised at current market levels,require the full cost of the option contract plus 10 percent of the current value of the underlying securities.

Step 4

Check with the broker and exchange if you're trading commodities and futures. These margins are specific dollar amounts per contract,rather than a percentage of the futures contract price or underlying security value. As of 2012,soybean futures have a margin of $5, 062 per contract,while gold futures contracts are $9, 112 per contract,even though the underlying asset values fluctuate constantly.

Tips

  • Complicated derivatives and option strategies combining multiple puts and calls have even more complicated margin calculations. The CBOE has a margin requirement calculator on its website to help investors figure the initial margin requirements for a specific combination of investments.
  • These figures are the minimum amounts,and individual brokers may have higher initial and maintenance margin requirements. When making options trades,your broker will calculate the initial margins for you before you enter into each specific trade.

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Popular Q&A

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- Find Marginal Rate of substitution for a unit of CD at her initial endowment?

Catherine has 20 pieces of CDs (C) and 10 pieces of DVDs (D). She has a utility function of:
U= 30 C^0.4 D^0.6
Find Marginal Rate of substitution for a unit of CD at her initial endowment.
Peter, her neighbor is willing to trade with her 4 pieces of CDs for every piece of DVD. Explain how Catherine should trade with Peter.

very unlikely that i can work out such a sum!

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How do you calculate the marginal rate of technical substitution?

How would you calculate the marginal rate of technical substitution between factor H and J when you have the production relationship J=A.(q^S1).(H^-S2)
q represents the rate of output and A, S1 and S2 are parameters

In economics, the Marginal Rate of Technical Substitution (MRTS) - or Technical Rate of Substitution (TRS) - is the amount by which the quantity of one input has to be reduced ( − Δx2) when one extra unit of another input is used (Δx1 = 1), so that output remains constant (y=y^-).
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where MP1 and MP2 are the marginal products of input 1 and input 2, respectively, and MRTS(x1,x2) is Marginal Rate of Technical Substitution of the input x1 for x2.
Along an isoquant, the MRTS shows the rate at which one input (e.g. capital or labor) may be subst…

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