Which of the following statements regarding a customer margin account is false Quizlet

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b.$2,000
To determine the amount of buying power, first determine the amount of excess equity. The formula for calculating the account's equity is long market value ($20,000) minus the debit balance ($9,000); therefore, the current equity balance is $11,000. The Regulation T requirement of 50% indicates that the customer should have equity of $10,000 ($20,000 x 50%), but has actual equity of $11,000. By comparing these two numbers, the result is excess equity of $1,000. The $1,000 of excess equity is recorded in the special memorandum account (SMA). The amount of buying power is ultimately calculated by multiplying the SMA balance by two (SMA x 2). In this example, the buying power is $2,000 ($1,000 x 2).

c. $32,500

The formula for calculating SMA is:

Actual equity - Reg T Requirement = SMA
•The equity in the long account is $100,000 ($150,000 LMV
- $50,000 DR).
•The equity in the short account is $30,000 ($75,000 CR
- $45,000 SMV).
•Total equity is $130,000.

•The Reg T requirement for the long account is $75,000 ($150,000 LMV x 50%).
•The Reg T requirement for the short account is $22,500 ($45,000 SMV x 50%).
•The total Reg T requirement is $97,500.
The combined SMA is, therefore, $32,500 ($130,000 Actual equity - $97,500 Reg T requirement).

d. The maximum loss is unlimited

This position, which is referred to as ratio writing or a variable hedge, has an objective to increase the income from writing more calls than stock owned. However, this is an extremely risky position and the client's maximum loss is unlimited since two calls were written against a long stock position of only 100 shares. This client is covered on one short call, but uncovered on the second short call, which results in the maximum loss being unlimited. If the market price trades at or below $60 and the options expire, the client will have a $600 profit since two calls were written. The breakeven point is found by taking the purchase price of $58 and subtracting the total premiums of 6, which equals $52. The maximum profit is $800, which is found by taking the difference between the purchase price and the strike price and adding the premiums received from writing the call options (60 - 58 + 3 + 3). A popular answer choice is a maximum loss of $5,200 (choice c), since students simply subtract the total premiums received ($600) from the total cost of the stock ($5,800). It is important in these questions to examine the entire position and to remember that the maximum loss on an uncovered call is unlimited.

c. The account will be adjusted on October 23 and a margin maintenance call will be issued

A short margin account is marked to the market once a day (daily) to make sure the account is above the maintenance requirement. The initial Regulation T margin requirement is 50% of $60,000, or $30,000. If the market value increases to $75 a share, the equity in the account will decline to $15,000. The current equity in the account is 20% of the short market value ($15,000 / $75,000), which is below the required 30% and, therefore, a margin maintenance call will be issued.

The SMA in the account is $4,500 and the equity is $21,000
First, determine the amount of the debit balance. If the customer purchased $48,000 worth of stock at a 50% margin requirement and deposited $24,000, the debit balance is $24,000 ($48,000 market value - $24,000 margin requirement = $24,000 debit balance).

XOP increased to $57 per share, making the market value $57,000. The equity increases to $33,000. The excess equity (SMA) is found by subtracting the FRB-required equity of $28,500 (50% of $57,000) from the actual equity in the account of $33,000. The SMA is, therefore, $4,500. The SMA remains in the account until it is used. The SMA balance will never decrease because of market movements. Securities held in a margin account that increase in value can create excess equity (SMA) but, if these securities later decline in value, this will not decrease SMA. The equity decreases since the market value declined to $45 per share and is now $21,000 ($45,000 -

A customer's margin account has a market value of $750,000 and a debit balance of $400,000. She also has a commodities account that has equity of $150,000. If the firm goes bankrupt, SIPC will provide coverage to this customer for:
a. $350,000 in the margin account and nothing for the commodities account
b. $150,000 in the commodities account and nothing for the margin account
c. $350,000 in the margin account and $150,000 in the commodities account
d. $500,000 in the margin account and $150,000 in the commodities account

d.$2,000

If the initial transaction in a margin account is a short sale, industry rules require a minimum equity deposit of $2,000 or the required
Reg. T deposit, whichever is greater. Since $2,000 is greater than $1,800, the required deposit is $2,000. For a purchase, the minimum equity requirement is the lesser of $2,000 or 100% of the purchase price.

b.$35,000

The key to this question is to recognize that the margin requirement on the shares is different than the margin requirement on the options. Since the $60,000 stock purchase is being made in a margin account, Regulation T requires the customer to deposit 50% of the purchase, which is $30,000 ($60,000 x 50%). However, since options cannot be purchased on margin, the contracts must be paid for in full. Therefore, the full $5,000 option premium payment is required. When the two requirements are added together the customer's required deposit is $35,000.

d.$76,000
This is a tricky question and the answer is based on the margin maintenance requirement of a short against the box position. If a client is long and short an equal number of shares of the same security, the maintenance requirement is equal to 5% of the long position. The maintenance requirement is equal to $4,000 (5% of $80,000). Therefore, the client is permitted to borrow 95% of $80,000, or $76,000. Choice (c) which is $40,000 (the Reg. T requirement of $80,000) is incorrect since it fails to take into account the client's total position.