Margin Flashcards
A client buys stock on margin and makes no cash deposit because he uses SMA. How are the account balances affected?
LMV and Debit both increase by the full purchase price; no change is made to equity.
True or False: Short against the box is considered being long and short the same position at the same time.
True
Upon the purchase of an option, Regulation T requires payment to be made within ____ business days.
Upon the purchase of an option, Regulation T requires payment to be made within 5 business days.
To meet a $20,000 Reg. T call, a customer could deposit cash of $________ or fully paid securities of $________.
To meet a $20,000 Reg. T call, a customer could deposit cash of $20,000 or fully paid securities of $40,000.
Identify this: Long a security convertible into an equal number of shares of a short position being carried.
Arbitrage in a margin account
Mutual fund shares have loan value after they have been owned for ____ days.
Mutual fund shares have loan value after they have been owned for 30 days.
What is the formula for finding equity in a combined margin account?
(LMV + Credit Balance - Debit Balance - SMV)
How long must new issues be held before they may be used as collateral?
30 days
How is the account affected if SMA is withdrawn?
Debit balance increases and equity decreases.
An account with equity below the Reg T requirement is called ____________.
An account with equity below the Reg. T requirement is called restricted.
How long can a short stock position be maintained?
Unlimited, provided the account maintains the minimum required equity.
What is the special minimum margin and maintenance requirement when selling short stock priced below $5 per share.
$2.50 per share or 100% of the market value - whichever is greater
The _____________________ has the authority to regulate margin requirements.
The Federal Reserve Board (FRB) has the authority to regulate margin requirements.
The formula for determining equity in a long margin account is: ____________ - __________ = Equity
The formula for determining equity in a long margin account is: Long Market Value (LMV) - Debit Balance = Equity
Existing account: LMV $40,000, Debit $25,000, Equity $15,000. How is SMA affected by receiving a $5,000 cash dividend?
SMA would be credited with $5,000 (100% of the deposit).
What document allows a BD to lend customer securities to someone wishing to sell them short?
Loan Consent Agreement
What is the Reg T margin requirement for short sales?
50%
On margin, Ben buys 100 shares of ABN at 50 and sells 1 ABN Oct 55 call at 3. What is Ben’s required cash deposit?
$2,200, which is 50% of the stock position minus the $300 premium received on the sale of the call
Existing account: LMV $40,000, Debit $25,000, Equity $15,000. If $5,000 is sold from the account, how is SMA affected?
SMA would be credited with $2,500 (50% of the sales proceeds).
When a customer buys on margin, how much cash may a BD borrow from a bank?
100% of the debit balance
A long margin account’s minimum initial equity requirement is _____% of the purchase or $______ , whichever is less.
A long margin account’s minimum initial equity requirement is 100% of the purchase or $2,000, whichever is less.
What formula can be used to determine how high the SMV can rise to be at the minimum maintenance requirement?
Credit Balance x 10/13
If an investor writes a covered call, is there a margin requirement on the option position?
No, the long stock position covers the sale of the call.
Calculate the combined equity in the following account: LMV $24,000, Debit $10,000, Credit $18,000, SMV $9,000
(24,000 + 18,000 - 10,000 - 9,000) = $23,000
Customers are given ____ business days after settlement date to pay for their portion of the trade.
Customers are given two business days after settlement date to pay for their portion of the trade. (S + 2 or T + 5)
True or False: Firms may establish their own in-house rules relating to payment dates and minimum requirements.
True. However, the requirements must be at least as stringent as those established by the regulators.
What may a BD lend to a customer in a margin account?
The complement of the Reg T margin call. In other words, 50%.
In order to sell short, Regulation SHO requires that securities be easy or hard to borrow?
Easy to borrow (called the locate requirement)
True or False: Customers are required to sign the Loan Consent Agreement.
False. Signing the agreement is optional.
How is buying power calculated?
SMA divided by Reg T of 50% (just remember SMA x 2)
On margin, an investor buys 100 shares of ABN at 50 and sells 1 ABN Oct 55 call at 3. What is the margin requirement?
$2,500, which is 50% of the stock position. Since this is a covered position, there’s no requirement on the short call
By how much is the following account restricted? LMV $40,000, Debit $25,000, Equity $15,000
Restricted by $5,000. The equity should be $20,000 (50% of $40,000), but there is only $15,000.
How will the sale of securities from an account affect the account balances?
LMV and Debit decrease by the sales proceeds, Equity stays the same, and SMA increases by 50% of the sales proceeds.
What does Regulation SHO regulate?
Short sales
Existing account: LMV $40,000, Debit $10,000, Equity $30,000, SMA $10,000. SMA is used for a $20,000 purchase. Result?
LMV $60,000 - Debit $30,000 = Equity $30,000 and SMA is $0
Hypothecation is synonymous with what term?
Pledge
What is a customer using when she borrows funds to increase the size of her position?
Leverage
Calculate SMA using the following balances: LMV $40,000, Debit $10,000 and Equity $30,000
Equity - 50% of the LMV = Excess Equity ($30,000 - $20,000 = $10,000)
Where will excess equity be recorded?
The Special Memorandum Account (SMA)
On margin, Henry sells short 100 shares of DEF at 68 and sells 1 DEF Oct 60 put at 4. What is the margin requirement?
$3,400, which is 50% of the short position. Since this is a covered position, there is no requirement on the short put.
True or False: An investor is able to protect a profit on a long position by being short against the box.
True. “Short against the box”refers to investors who have sold stock short that they currently hold in their portfolio.
What is the rate of interest that a bank charges a BD on margin loans?
Call rate
The formula for determining equity in a short margin account is: ____________ - ____________ = Equity
The formula for determining equity in a short margin account is: Credit Balance - Short Market Value (SMV) = Equity
What formula can be used to determine how far the LMV can fall to be at the minimum maintenance requirement?
Debit Balance x 4/3 or Debit Balance ÷ 75%
May new issues (e.g., IPOs or mutual fund shares) be purchased on margin?
No
How would a $2,000 cash dividend or voluntary cash deposit affect a margin account’s balances?
LMV is unchanged, Debit is reduced by $2,000, Equity is increased by $2,000, and SMA is increased by $2,000.
True or False: If a stock is shorted and a dividend is declared, the short seller must pay the lender the dividend.
True
The current Reg T margin requirement is ____%.
The current Reg T margin requirement is 50%.
The minimum equity requirement for the initial short sale in a margin account is $_______ .
The minimum equity requirement for the initial short sale in a margin account is $2,000.
What is the margin requirement for a short against the box position?
5% of the long position
The industry minimum maintenance requirement for a short account is ____%.
The industry minimum maintenance requirement for a short account is 30%. (Equity must be at least 30% of SMV.)
Define Regulation T.
The percentage a customer must deposit when purchasing securities or selling short
The ________________ Agreement describes the customer’s pledging of securities as collateral to the BD.
The Hypothecation Agreement describes the customer’s pledging of securities as collateral to the BD.
What is the maximum amount of securities that a BD may rehypothecate to a bank?
140% of the debit balance
On margin, Emma shorts 100 shares of DEF at 68 and sells 1 DEF Oct 60 put at 4. What is Emma’s required cash deposit?
$3,000, which is 50% of the short position minus the premium received on the sale of the put
The maximum potential loss when selling short is ____________.
The maximum potential loss when selling short is unlimited.
Existing account: LMV $40,000, Debit $10,000, Equity $30,000, SMA $10,000. If SMA is withdrawn, what are the balances?
LMV $40,000 - Debit $20,000 = Equity $20,000 and SMA is $0
The credit balance is made up of what two components?
Short sales proceeds plus the Reg. T requirement
What is the margin requirement when buying options?
100% of the premium
True or False: Restricted accounts must be remedied immediately by depositing the appropriate dollar amount.
False. Restricted accounts do not require immediate response.
Is there a margin requirement when engaging in arbitrage in a margin account?
Yes, 10% of the current market value of the long position.
What stocks does the FRB deem to be marginable?
Those stocks listed on major exchanges and on Nasdaq
True or False: Market declines will reduce SMA.
False. The only way to lose SMA is to use SMA.
Does the payment date requirement of Regulation T apply to cash or margin accounts?
Payment is required within 5 business days for both (100% in a cash account, 50% in a margin account).
True or False: Uncovered option positions have a margin requirement, while covered positions do not.
True, however, no calculation of the requirement is tested.
Any amount of equity greater than 50% is called _______________.
Any amount of equity greater than 50% is called excess equity.
If a client’s equity falls below 25%, the maintenance call must be met __________.
If a client’s equity falls below 25%, the maintenance call must be met promptly.
Secondary market trades involving U.S. Government securities settle _____________________.
Secondary market trades involving U.S. Government securities settle next business day (T + 1).
In a margin account, customers pay interest on the ________ balance.
In a margin account, customers pay interest on the debit balance.
The _________________________ regulates margin requirements.
The Federal Reserve Board (FRB) regulates margin requirements.
A client with $3,000 of SMA has buying power of $________.
A client with $3,000 of SMA has buying power of $6,000 (the SMA balance x 2).
Securities that are acceptable as collateral have a loan value that equals ____%.
Securities that are acceptable as collateral have a loan value that equals 50%.
What amount of fully paid securities must be deposited to meet a margin requirement?
Securities with a loan value equal to the margin call (in other words, two times the margin call)
The industry minimum maintenance requirement for a long account is ____%.
The industry minimum maintenance requirement for a long account is 25%. (Equity must be at least 25% of LMV.)
____________ governs the extension of credit by BDs.
Regulation T governs the extension of credit by BDs.
