Hello,
I was digging around here (and the internet) for some good examples on margin calculations. All of the examples I see talk about being fully leveraged on your account (i.e.: have 10k cash, buy 20k securities). I would like to see some examples where you are NOT fully leveraged.
So I thought I'd try this. I would appreciate it if someone would check my maths.
I'm taking the expectation that we are dealing with a Reg T Margin Account, with 50% maintenance margin. For simplicity sake I'm looking at LONG positions kept overnight. I'm using SPY (S&P 500 ETF) as the asset to avoid specifics with regards to Futures/Indexes. Additionally, to make things interesting, I'm not dealing with an account holding cash, only with one that is fully invested.
Start off with:
Margin Account with $1,000,000 in SPY
Equity = $1,000,000
Day 1:
Purchase $100,000 in SPY
Loan Value = $100,000 (Broker lends you this amount to make the purchase)
Total Asset Value = $1,000,000 (original positions) + $100,000 (new purchase) = $1,100,000
Equity = Total Assets - Loan = ($1,000,000 + $100,000) - $100,000 = $1,000,000
Maintenance Margin = 50% * Loan = $50,000
(At this point we have no problems and do not worry at all about a margin call. We enjoy having the position in our portfolio as if we bought it with pure cash).
Day 2:
SPY drops 50%
Total Asset Value = 50% * $1,100,000 = $550,000
Equity = Total Assets - Loan = $550,000 - $100,000 = $450,000
Equity ($450,000) > Maintenance Margin ($50,000)
(At this point, even after a 50% drop, we are still safe and do not have to worry about a margin call).
So the question is: How bad would the drop have to be before we do worry about the margin call?
We will get a margin call if:
Equity < Maintenance Margin
Equity = Total Assets - Loan
Maintenance Margin = $50,000
Therefore simple algebra:
Total Assets - Loan < Maintenance Margin
Total Assets < Maintenance Margin + Loan
Total Assets < $50,000 + $100,000
Total Assets < $150,000
Which means that total assets drops to 13.63% (or an 86.36% drop)
150,000 / 1,100,000 = 13.63%
1 - 13.63% = 86.36%
If SPY drops more than 86.36% there will be a margin call.
If SPY drops more than 86.36% we will have more to worry about than a margin call
But this is a safe way to use margin on your account because the amount being borrowed is very small ($100,000).
Anyone see any mistakes in my maths?
Thank you.
I was digging around here (and the internet) for some good examples on margin calculations. All of the examples I see talk about being fully leveraged on your account (i.e.: have 10k cash, buy 20k securities). I would like to see some examples where you are NOT fully leveraged.
So I thought I'd try this. I would appreciate it if someone would check my maths.
I'm taking the expectation that we are dealing with a Reg T Margin Account, with 50% maintenance margin. For simplicity sake I'm looking at LONG positions kept overnight. I'm using SPY (S&P 500 ETF) as the asset to avoid specifics with regards to Futures/Indexes. Additionally, to make things interesting, I'm not dealing with an account holding cash, only with one that is fully invested.
Start off with:
Margin Account with $1,000,000 in SPY
Equity = $1,000,000
Day 1:
Purchase $100,000 in SPY
Loan Value = $100,000 (Broker lends you this amount to make the purchase)
Total Asset Value = $1,000,000 (original positions) + $100,000 (new purchase) = $1,100,000
Equity = Total Assets - Loan = ($1,000,000 + $100,000) - $100,000 = $1,000,000
Maintenance Margin = 50% * Loan = $50,000
(At this point we have no problems and do not worry at all about a margin call. We enjoy having the position in our portfolio as if we bought it with pure cash).
Day 2:
SPY drops 50%
Total Asset Value = 50% * $1,100,000 = $550,000
Equity = Total Assets - Loan = $550,000 - $100,000 = $450,000
Equity ($450,000) > Maintenance Margin ($50,000)
(At this point, even after a 50% drop, we are still safe and do not have to worry about a margin call).
So the question is: How bad would the drop have to be before we do worry about the margin call?
We will get a margin call if:
Equity < Maintenance Margin
Equity = Total Assets - Loan
Maintenance Margin = $50,000
Therefore simple algebra:
Total Assets - Loan < Maintenance Margin
Total Assets < Maintenance Margin + Loan
Total Assets < $50,000 + $100,000
Total Assets < $150,000
Which means that total assets drops to 13.63% (or an 86.36% drop)
150,000 / 1,100,000 = 13.63%
1 - 13.63% = 86.36%
If SPY drops more than 86.36% there will be a margin call.
If SPY drops more than 86.36% we will have more to worry about than a margin call
But this is a safe way to use margin on your account because the amount being borrowed is very small ($100,000).
Anyone see any mistakes in my maths?
Thank you.
For me the 1M account was the realistic example 