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Margin requirement is industry standard at 30% of total portfolio (cash + margin loan)

e.g. You have 600k in equities purchased with cash and 400k in equities purchased on margin loan. The total portfolio is $1mil. The maintenance requirement is 600k + 400k = 1mil(30%) = 300k.

However, if your portfolio draws down 20% to 800k, the maintenance requirement also goes down to 800k(30%) = $240k

I'm looking for a formula where I can know what % drawdown my portfolio can handle until it hits a margin call.

I hope I explained that correctly, and thank you!

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2 Answers 2

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Define

CoL = cash or loan (cash if positive, loan if negative)

MVL = market value of long positions

MRP = Maintenance Margin Requirement fraction (=0.3)

NetLiq = liquidation value (aka total equity) = CoL + MVL

DD = downward return due to market movement

The maintenance margin condition is: "the equity must be at least 30% of the value of the securities"

NetLiq >= MRP*MVL or CoL+MVL >= MRP*MVL

Suppose MVL drops by DD i.e. MVL is replaced by MVL*(1-DD) such that the margin condition holds exactly

Col+(1-DD)*MVL = MRP*MVL*(1-DD)

Solving for DD we get the desired result:

$$DD=1+\frac{CoL}{MVL*(1-MRP)}$$

Using CoL = -400,000 MVL = 1,000,000 MRP = 0.30 we get DD = 0.428571429 as amdopt also found through a more roundabout method.

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  • $\begingroup$ Alex, I think you figured it out exactly what I’m looking for my friend. Thank you! $\endgroup$
    – user34126
    May 6, 2018 at 14:15
  • $\begingroup$ In that case, I would appreciate your upvote. $\endgroup$
    – Alex C
    May 6, 2018 at 14:30
  • $\begingroup$ Alex, I left you an upvote , but because my reputation is below 15, the upvote is recorded but not publicly viewable. Sorry. How about a small token of my appreciation, $1 via Venmo? $\endgroup$
    – user34126
    May 6, 2018 at 15:16
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    $\begingroup$ Probably best to accept the answer then. That is the intended functionality. $\endgroup$
    – Bob Jansen ♦
    May 6, 2018 at 16:36
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At a 43% draw your excess liquidity hits zero and you get a margin call.

Cash = -400,000 (400k margin loan)

Securities = 571,428.60 @ ~43% drawdown

Net Liquidation Value = 174,428.57 (Cash + Securities)

Margin Req @30% = 174,428.57

Excess Liquidity = 0 (Net Liq - Margin Req)

Solve for DD in the formula below or use something like the Goal Seek function in Excel. Below is an example of how you might set up a spreadsheet to use Goal Seek. 42.8571428571429% is the exact number Excel returns.

0 = Cash+Securities*(1-DD)-Securities*(1-DD)*Margin Req

     Cash         Securities    Drawdown    Margin Req
 $(400,000.00)	 $1,000,000.00        43%        30%


    Excess Liquidity        
     $(0.00)
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  • $\begingroup$ Thanks for your response. I used the above monetary numbers as an example. I'm specifically looking for the formula I can use so that I can plug in real time numbers at any time in the future. $\endgroup$
    – Geo
    Apr 13, 2018 at 15:36
  • $\begingroup$ If (Cash + Securities) - (Securities x Margin Req) < 0 then Margin Call $\endgroup$
    – amdopt
    Apr 13, 2018 at 15:40
  • $\begingroup$ You may want to give your broker a call as well to make sure that they don't use a custom calculation. My answer is pretty generic. I was just trying to give you an idea of how it might be done... $\endgroup$
    – amdopt
    Apr 13, 2018 at 15:41
  • $\begingroup$ I'm trying to solve for % draw down needed to hit margin call which the above formula does not solve. $\endgroup$
    – Geo
    Apr 13, 2018 at 16:10
  • $\begingroup$ Edited to include the formula. Good luck $\endgroup$
    – amdopt
    Apr 13, 2018 at 16:37

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