Join our investing community

Margin Loans Margin Lending Formulas!!

Discussion in 'Finance & Banking' started by casey26, 28th Oct, 2007.

  1. casey26

    casey26 New Member

    Joined:
    28th Oct, 2007
    Posts:
    1
    Location:
    Victoria
    Hi everyone, I have been trying for weeks to find formulas for margin lending to work out how much cash and or shares need to be used to avoid a margin call when the margin and buffer have been exceeded to restore the margin.

    Secondly how much of the exisitng portfolio needs to be sold to meet the margin call. I have contacte dthe major margin lenders who say they cannot provide formulas as its all worked out automatically for their employees!
    Any Help you could give me would be greatly appreciated!
    Seriously stressed

    Casey
     
  2. Glebe

    Glebe Well-Known Member

    Joined:
    15th Aug, 2005
    Posts:
    932
    Location:
    Sydney, NSW
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,623
    Location:
    Sydney, Australia
    My spreadsheet doesn't cover how much you need to sell to cover the margin call - I'll have to add that in ... it's a lot more than you think it may be - because they generally insist you pay all the way back to your max LVR (ie. you have to pay ball ALL of the buffer) :eek:

    This is one of the main reasons margin calls can be so painful.

    Eg. if you have a max LVR of 70% and a 10% buffer, you can get to 80% LVR before you get a margin call, but then when you do, you need to sell down (or provide enough additional capital) to get you back to 70% LVR ... that's a pretty big hit.
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,623
    Location:
    Sydney, Australia
    I know this is an old thread - but I figured someone might be searching and come across it ... so it might be worth providing a formula as per the original request:

    Assumptions
    - the margin lender requires you to clear the buffer completely
    - you sell units or shares to pay down the loan
    - all shares/units have the same maximum LVR

    Description of values
    MarginCall: the amount of cash required to clear the buffer
    MaxLVR: the maximum allowed LVR for the portfolio
    Value: the current value of the portfolio
    Loan: the outstanding loan

    MarginCall = (Loan - ((MaxLVR / 100) * Value)) / (1 - (MaxLVR / 100))

    Example:

    MaxLVR = 70%
    Value = $10,000
    Loan = $8,000
    Current LVR = $8,000 / $10,000 = 80%

    MarginCall = (8000 - ((70 / 100) * 10000)) / (1 - (70 / 100))
    MarginCall = (8000 - 7000) / 0.3
    MarginCall = 1000/0.3 = need to sell $3,333.33 worth of units/shares required to restore buffer

    Test: sell $3,333.33 and use proceeds to pay off loan
    New value = $6,666.67, new loan = $4,666.67, new LVR = 70%

    If you have a portfolio of multiple shares/funds, each with different max LVRs or if you are able to put cash into the loan, the formula will be different.

    If you are using cash to restore the buffer, the formula is a little simpler:

    MarginCall = Loan - ((MaxLVR / 100) * Value)

    Example (as above):

    MarginCall = (8000 - ((70 / 100) * 10000))
    MarginCall = 8000 - 7000
    MarginCall = 1000 = need to pay down the loan by $1,000 to restore buffer

    Test: pay $1,000 off the loan
    Value = $10,000, new loan = $7,000, new LVR = 70%