Maintenance of margin
In this article, we discover what margin is, how you can put it to work in your portfolio, the inherent risks and the power of leverage upon your asset base.
The Definition of Margin
Defined, margin is essentially investing with borrowed money. Any eligible individual may purchase securities on margin by borrowing money from their broker at a fixed interest rate (for example, 9.5%). The rate is determined by each brokerage house and normally decreases as the amount borrowed increases (e.g., an investor borrowing $500, 000 will pay a substantially lower rate than one borrowing $5, 000).
Each brokerage house establishes a margin maintenance requirement. This maintenance requirement is the percentage equity the investor must keep in his portfolio at all times. A house that maintains a 30% maintenance requirement, for example, would lend up to $2.33 for every $1 an investor had deposited in his account, giving him $3.33 of assets with which to invest. An investor with only one or two stocks in his portfolio may be subject to a higher maintenance requirement (typically 50%) because the broker believes the risk of default is greater due to the lack of diversification.
The Power of Leverage - An Example of Margin Trading
A speculator deposits $10, 020 into his margin-approved brokerage account. The firm has a 50% maintenance requirement and is currently charging 8% interest on loans under $50, 000.
The speculator decides to purchase stock in a company. Normally, he would be limited to the $10, 020 cash he has at his disposal. Utilizing margin, however, he borrows just under the maximum amount allowable ($10, 000 in this case), giving him a grand total of $20, 020 to invest. He pays a $20 brokerage commission and uses the $20, 000 ($10, 000 his money, $10, 000 borrowed money) to buy 1, 332 shares of the company at $15 each.
Self-Regulatory Organizations; ICE Clear Europe Limited; Order Granting .. — Insurance News Net
ICE Clear Europe states that the changes to the Risk Policy amend the calculation of CDS initial margin requirements to comply with margin requirements under EMIR Article 41 and Article 24 of the implementing Regulatory Technical Standards. /5/ ICE ..
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Maintenance Margin Question?
A company enters into a short futures contract to sell 5000 bushels of wheat for 450 cents per bushel. The initial margin is $3000 and the maintenance margin is $2000. What price change would lead to a margin call? Under what circumstances could $1500 be withdrawn from the margin account?
The total notional is 5000 * $4.50 = $22500. If the initial margin is $3000 and the maintenance margin is $2000, the total notional would have to fall by $1000 to hit the margin call.
so that value would be $23500/5000 = $4.70. If the price went up to 470 cents a barrel you would get a margin call.
In the second question that would be ($22500 - $ 1500)/5000 = $4.20. the price would have to fall to $4.20 for you to be able to withdraw $1500