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2. Leverage Trades & Margin Requirements
 Leverage trades involve buying a security with borrowed funds, brokerage houses
keep the stocks as collateral
 Initial Margin (IM): The minimum fraction of the purchase price that must be
deposited as the trader’s equity.
 Maintenance Margin (MM): Minimum margin to be maintained in the margin
account
• If the equity value falls below the maintenance margin requirement, the buyer is
asked to deposit money so that equity value goes to maintenance margin
requirements, otherwise the broker will close the position to prevent further losses.
 Money deposited to bring the margin account equal to the maintenance margin
requirement is called Variation margin (VM)
P * (1  Initial Margin)
Margin Call Price  For Margin Purchase
(1  Maintenance Margin)
P * (1  Initial Margin)
Margin Call Price  For Short Sale
(1  Maintenance Margin)
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3. Concept Checker
 Consider a long position of a ABC stock. The current price of ABC is $100. Mark
enters into a leverage buy at the current price of $100. The required initial margin is
30% and the maintenance margin is 20%. Compute the margin account balance for
this position after:
• $5 decrease in price on Day 1
• $15 decrease in price on Day 2
• $10 increase in price on Day 3
A. $20
B. $10
C. $30
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4. Answer
C
Day Opening Price Daily Balance Variation
Balance Change Margin
0
$30 $100 0 $30
(Purchase)
1 $30 $95 ($5) $25
2 $25 $80 ($15) $10 $10
3 $20 $90 $10 $30
 The Margin Account Balance after three days is $ 30
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