Granted I literally just learned the concept a few hours ago (thats why I finally got round to watching the film lol) and perhaps I misunderstood but did I miss something?
shareIt wasnt a margin call as I understand it.... a margin call is made by a broker, lender, etc. when you own securities purchased with money you borrowed from them that then sink in value. Then the broker wants the difference in cash. In this case they made a margin call on themselves by selling assets to cover the potential libailty. Needless to say buying equity on margin is risky business.
They could have come up with a better title.
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What they are doing is dumping risky assets. It really hasn't got much to do with margin calls at all. But I think the film "Arbitrage" has nothing to do with arbitrage. They're just terms to conjure with.
shareNo. The positions they are holding are levered by using borrowed money or debt. When the collateral used for the loans ... The MBS ... loses value, the loans or margin, iare called in. In this movie that would be a potential problem when the real value of the assets is known. The combined trading losses and loans due would exceed the company's capitalization.
shareThe situation the company was in is effectively the same thing that happens when you get a margin call. So the title was a good choice.
When you borrow money to buy with leverage, you have to have some tangible equity in the account behind the loan. For an individual brokerage account, it's called the maintenance margin requirement. If the amount borrowed exceeds the amount of real equity in your account by a certain ratio, you are forced to reduce the amount loaned by selling assets(a margin call).
In the case of the company, there wasn't an externally imposed maintenance margin requirement but they would have owed more than the company was worth. So they were forced to raise cash equity by dumping their portfolio of MBS and consequently reduce the amount of money they were borrowing.
As others pointed out, from a financial perspective there wasn't a direct margin call. But consider the meaning of the words - the company was in the margins of their ledgers, about to run off the end of the page... and they made the call to dump it all.
It's a bit of a stretch, but I think the visual works.
If you are buying and selling derivatives then you are buying a highly leveraged instrument.
Even for a small investment in a futures or options contract a big swing against you can result in a large loss. When you buy stocks the maximum you can lose is the initial investment. If you buy a derivative then if the position goes against you potentially you can lose more than your initial investment.
Brokers will ask for margin to cover any short term losses. If the loss goes further against you then you will get a margin call whereby you have to provide more cash to keep the position open or be automatically closed out.
Hope that helps you.
The term was also used in Trading Places. Right at the end when the Duke brothers have been ruined by their disastrous trading in frozen orange juice, representatives of the NYSE ask them to settle up their debts and they are informed "Margin call gentlemen". So in a simple sense its the point of financial reckoning. Hope this helps even though its a long time since you posed your question
shareAll true, the only market where it happens every day is the futures market. I mean literally your bank balance is credited or debited every day, for the difference.
shareBut you gotta agree the title sounds good and Simon Baker he just went in there and made the call!
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