Margin calls and the financial markets decline

Some of the rapid drops weve seen in the financial markets in recent weeks have been fueled by margin calls. How do margin calls work? Marketplace Senior Editor Paddy Hirsch explains.

Category:

Education

Tags:

• Marketplace
• business
• money
• shortselling
• financialCrisis
• creditCrisis
• PaddyHirsch

[kktg1001]

sounds like a repo

[eswyatt]

Nice. But I would like to have seen a bit more on how Jill increased her percentage return by doing what she did. Maybe it would have been a more useful illustration if she had kept $25, (bought only 3 dolls), and borrowed $75. Then you could show an actual percentage return on the $25 investment as opposed to $100. Also, might have given an intuitive sense of the multiplication of risk.

[tenou213]

@kake1776 Jill spent her money on Barbies but needs more money to do something else. She has to take on additional risk in order to gain the reward of using another $100.

All Amy is doing is providing additional restrictions that minimize her risk. Jill is the one in need here - she has a high demand for the money and Amy is the supplier.

[LoveVitale]

Thank you! Great video and very nicely explained.

[aceman2001]

yeah it seems like amy earns no interest for her risk exposure...

[kake1776]

I thought that if all goes as planned, Jill gets her 100 bucks back and Amy gets her doll back and then they're even.

I thought Jill should get something over the 100 if the deal goes as planned because of her risk.

Although if the thin mints sold for 200, Amy gets her 100 loan back and Jill gets the other 100 and then scores the four barbies. What a jip? I'm just wondering what was in it for Jill to make the loan. Even if she got to keep the barbie when it dropped 25%, she's stil even.

[nutsbutdum]

In addition to the $100 loan, Amy asked Jill for 1 doll as a margin, and she gets 1 doll too whenever the price drops 25%.

Jill gets a margin call from Amy every time the price goes down 25% remainding her to send 1 more doll.(unless of course Amy decides that Jill needs to sell all the cookies at any given value and return whatever money is left)

That's the reward!

[kake1776]

I am confused. What does Amy get out of this contract? If the box sells for 100, Amy gets her money back and the barbie goes back to Jill, I guess it is, then what reward does Amy get for risking the 100 loan?