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Margin Loans toolkit - % decline before margin call

Discussion in 'Managed Funds & Index Funds' started by tasmo, 3rd Jun, 2006.

  1. tasmo

    tasmo Well-Known Member

    Joined:
    2nd Jun, 2006
    Posts:
    47
    Location:
    Canberra, ACT
    Hi, I have just registered as a member, although I have been reading InvestEd for a while since I invested in the Navra Australian funds. Found InvestEd to be very informative and useful.:)

    Previously I have not had access to Margin loan spreadsheet in the Toolkit section. However I have just tried it and believe it is incorrect in respect of how BT Margin Lending offers a 10% buffer.

    The InvestEd toolkit margin loans spreadsheet assumes a 10% buffer is a 10% increase on the loan available at your Maximum gearing ratio (MGR). However on the BT web site under Margin Lending calculators they have what they call a 'Transaction Simulator', and it is a very educational margin loan calculator. :)

    BT is my margin lender, but you don't need to be signed into a BT account to use it (when you are signed in, it brings up your current position prior to any simulations). Anyone can use the simulator, eg; to build a position by repayment (deposits) and purchases and then click on the percent decline caption.

    It clearly shows that if your LVR is 70% with a 70% MGR your holdings will need to decline by 13% to trigger a margin call. Then applying a minus 13% decline in value to holdings, it shows the loan has gone to 80.4% the value of holdings and a magin call of 0.4% is now active, ie; the 10% buffer allows your loan to go to 80% of your holdings value, not 77% (10% increase on 70%) as shown in the InvestEd spreadsheet.

    Thus the BTML 10% buffer appears to allow a 10% decline in equity rather than a 10% loan increase, a nice little extra buffer equating to a 13% decline in holdings in the above example.

    Cheers
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Thanks tasmo - I'll have to confirm with Leveraged Equities (who I use) how they actually calculate it. I might have to redo the spreadsheet. At least I didn't overstate it :D

    (PS. I moved your post to a new thread)
     
  3. tasmo

    tasmo Well-Known Member

    Joined:
    2nd Jun, 2006
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    Location:
    Canberra, ACT
    Hi Sim,
    Raises an interesting question for myself, as I assumed all lenders calculated buffers in same manner. Now I have just refinanced with St George Margin Lending who also offer 10% buffer, but they don't have the neat transaction simulator that BTML has.

    Cheers,

    tasmo
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
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    Location:
    Sydney, Australia
    I've already started planning to build a full margin loan simulator for invested - and it would be useful to work out how each of the margin lenders actually calculate these things to make it more accurate.
     
  5. tasmo

    tasmo Well-Known Member

    Joined:
    2nd Jun, 2006
    Posts:
    47
    Location:
    Canberra, ACT
    Hi Sim,
    An article today by Simon Hoyle SMH provides a simple formula for calculating percentage fall in your portfolio which will trigger a margin call. I have compared results to BTML simulator and results match.

    "Margin Call Trigger (% decline) = 100[1-(AVR/(LVR+B))] where AVR is your actual loan-to-valuation ratio, the LVR is the maximum allowed loan-to-valuation ratio, and B is the so-called "buffer" (a "grey area" that allows your debt to temporarily exceed the maximum LVR)."


    ( http://www.smh.com.au/news/business/relax--its-steady-as-she-goes/2006/06/09/1149815313846.html )

    Cheers