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margin call

Page history last edited by PBworks 12 years, 10 months ago

 

Margin Call

 

 

And the credit crunch of 2007 / 2008

 

see our discussion on Possible recession in 2008,    credit crisis of 2007,    Private equity

 

 

Headlines: 

 

  • "Hedge funds and Private equity industries face "margin calls" as brokers deleverage"....but, what does this mean? 
  • Carlyle Group -world's second-largest buy-out group- trading suspended; further expected margin calls could deplete capital--> made leveraged bets on AAA agency bonds
  • Sudden Debt, FT: Almost all structured finance transactions are based on unfunded margin debt--> Margin debt cannot be "restructured" with falling asset prices

 

Definition / Interpertation:

 

according to investopedia:  "A broker's demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin.  This is sometimes called a "fed call" or "maintenance call". " You would receive a margin call from a broker if one or more of the securities you had bought (with borrowed money) decreased in value past a certain point. You would be forced either to deposit more money in the account or to sell off some of your assets"

 

What is Margin?

 

In the Forex market the term margin is most often referring to the amount of money required to open a leveraged position, or a contract in the market. It may also be used to describe the type of account, i.e. margin account; meaning that an account is being traded on borrowed funds. It is generally safe to assume that all off-exchange retail foreign currency (or Forex) traders are trading within margined accounts. Without leverage, or the ability to trade on borrowed funds, a trader placing a standard lot trade in the market would need to post the full contract value of $100,000 in order to have his or her trade executed. Trading with a margined account allows traders to utilize leverage, meaning that the same $100,000 contract can be placed for an amount of margin determined by the set level of leverage. An account at 100:1 leverage would require $1,000 of margin to place a $100,000 trade.

 

 

related terms:

 

Broker's Call

Buying Power

Call Loan

Call Loan Rate

Federal Reserve Board - FRB

Initial Margin

Leverage

Maintenance Margin

Margin

Margin Account

Market Value

Remargining

 

More info: 

 

There are two restrictions imposed on the amount you can borrow. First, the initial margin, which is the initial amount you can borrow. Second, the maintenance margin, which is the amount you need to maintain after you trade. These amounts are set by the Federal Reserve Board, as well as your brokerage. Individual brokerages can have stricter limits, but the Federal Reserve Board sets a minimum initial margin of 50% and a maintenance margin of at least 25%.

 

Our focus in this section is the maintenance margin. In volatile markets, prices can fall very quickly. If the equity (value of securities minus what you owe the brokerage) in your account falls below the maintenance margin, the brokerage will issue a "margin call". A margin call forces the investor to either liquidate his/her position in the stock or add more cash to the account.

 

If for any reason you do not meet a margin call, the brokerage has the right to sell your securities to increase your account equity until you are above the maintenance margin. Even scarier is the fact that your broker may not be required to consult you before selling! Under most margin agreements, a firm can sell your securities without waiting for you to meet the margin call. You can't even control which stock is sold to cover the margin call.

read more here...

 

 

Table of Contents
1) Margin Trading: Introduction
2) Margin Trading: What Is Buying On Margin?
3) Margin Trading: The Dreaded Margin Call
4) Margin Trading: The Advantages
5) Margin Trading: The Risks
6) Margin Trading: Conclusion

 

 

 

External Links

 

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