Definition of Margin call
Margin call
A demand for additional funds because of adverse price movement. Maintenance margin
requirement, security deposit maintenance
margin of safety With respect to working capital management, the difference between 1) the amount of longterm
financing, and 2) the sum of fixed assets and the permanent component of current assets.
Related Terms:
A sum, usually smaller than -but part of the original margin, which must
be maintained on deposit at all times. If a customer's equity in any futures position drops to, or under, the
maintenance margin level, the broker must issue a margin call for the amount at money required to restore the
customer's equity in the account to the original margin level. Related: margin, margin call.
A figure determined by the closing range which is used to calculate gains and losses in
futures market accounts. Settlement prices are used to determine gains, losses, margin calls, and invoice
prices for deliveries. Related: closing range.
The ratio of net income to net sales.
The ratio of net income before taxes to net sales.
A transaction in which an investor borrows to buy additional shares, using the shares
themselves as collateral.
An option that gives the right to buy the underlying futures contract.
To exercise a call option.
A date before maturity, specified at issuance, when the issuer of a bond may retire part of the bond
for a specified call price.
Also called the broker loan rate , the interest rate that banks charge brokers to finance
margin loans to investors. The broker charges the investor the call money rate plus a service charge.
An option contract that gives its holder the right (but not the obligation) to purchase a specified
number of shares of the underlying stock at the given strike price, on or before the expiration date of the
contract.
call premium
Premium in price above the par value of a bond or share of preferred stock that must be paid to
holders to redeem the bond or share of preferred stock before its scheduled maturity date.
The price, specified at issuance, at which the issuer of a bond may retire part of the bond at a
specified call date.
The price for which a bond can be repaid before maturity under a call provision.
A feature of some callable bonds that establishes an initial period when the bonds may not be
called.
An embedded option granting a bond issuer the right to buy back all or part of the issue prior
to maturity.
The combination of cash flow uncertainty and reinvestment risk introduced by a call provision.
Call swaption
A swaption in which the buyer has the right to enter into a swap as a fixed-rate payer. The
writer therefore becomes the fixed-rate receiver/floating rate payer.
Callable
A financial security such as a bond with a call option attached to it, i.e., the issuer has the right to
call the security.
Contribution margin
The difference between variable revenue and variable cost.
Covered call
A short call option position in which the writer owns the number of shares of the underlying
stock represented by the option contracts. Covered calls generally limit the risk the writer takes because the
stock does not have to be bought at the market price, if the holder of that option decides to exercise it.
Covered call writing strategy
A strategy that involves writing a call option on securities that the investor
owns in his or her portfolio. See covered or hedge option strategies.
Deferred call
A provision that prohibits the company from calling the bond before a certain date. During this
period the bond is said to be call protected.
Dollar safety margin
The dollar equivalent of the safety cushion for a portfolio in a contingent immunization
strategy.
Effective call price
The strike price in an optional redemption provision plus the accrued interest to the
redemption date.
Effective margin (EM)
Used with SAT performance measures, the amount equaling the net earned spread, or
margin, of income on the assets in excess of financing costs for a given interest rate and prepayment rate
scenario.
First-call
With CMOs, the start of the cash flow cycle for the cash flow window.
Gross profit margin
Gross profit divided by sales, which is equal to each sales dollar left over after paying
for the cost of goods sold.
Implied call
The right of the homeowner to prepay, or call, the mortgage at any time.
Initial margin requirement
When buying securities on margin, the proportion of the total market value of
the securities that the investor must pay for in cash. The Security Exchange Act of 1934 gives the board of
governors of the Federal Reserve the responsibility to set initial margin requirements, but individual
brokerage firms are free to set higher requirements. In futures contracts, initial margin requirements are set by
the exchange.
Irrational call option
The implied call imbedded in the MBS. Identified as irrational because the call is
sometimes not exercised when it is in the money (interest rates are below the threshold to refinance).
Sometimes exercised when not in the money (home sold without regard to the relative level of interest rates).
Margin
This allows investors to buy securities by borrowing money from a broker. The margin is the
difference between the market value of a stock and the loan a broker makes. Related: security deposit (initial).
Margin account (Stocks)
A leverageable account in which stocks can be purchased for a combination of
cash and a loan. The loan in the margin account is collateralized by the stock and, if the value of the stock
drops sufficiently, the owner will be asked to either put in more cash, or sell a portion of the stock. margin
rules are federally regulated, but margin requirements and interest may vary among broker/dealers.
Margin requirement (Options)
The amount of cash an uncovered (naked) option writer is required to
deposit and maintain to cover his daily position valuation and reasonably foreseeable intra-day price changes.
Marginal
Incremental.
Marginal tax rate
The tax rate that would have to be paid on any additional dollars of taxable income earned.
Net operating margin
The ratio of net operating income to net sales.
Net profit margin
Net income divided by sales; the amount of each sales dollar left over after all expenses
have been paid.
Operating profit margin
The ratio of operating margin to net sales.
Original margin
The margin needed to cover a specific new position. Related: margin, security deposit (initial)
Profit margin
Indicator of profitability. The ratio of earnings available to stockholders to net sales.
Determined by dividing net income by revenue for the same 12-month period. Result is shown as a
percentage.
Provisional call feature
A feature in a convertible issue that allows the issuer to call the issue during the noncall
period if the price of the stock reaches a certain level.
Put-call parity relationship
The relationship between the price of a put and the price of a call on the same
underlying security with the same expiration date, which prevents arbitrage opportunities. Holding the stock
and buying a put will deliver the exact payoff as buying one call and investing the present value (PV) of the
exercise price. The call value equals C=S+P-PV(k).
Uncovered call
A short call option position in which the writer does not own shares of underlying stock
represented by his option contracts. Also called a "naked" call, it is much riskier for the writer than a covered
call, where the writer owns the underlying stock. If the buyer of a call exercises the option to call, the writer
would be forced to buy the stock at market price.
Variation margin
An additional required deposit to bring an investor's equity account up to the initial margin
level when the balance falls below the maintenance margin requirement.
Yield to call
The percentage rate of a bond or note, if you were to buy and hold the security until the call date.
This yield is valid only if the security is called prior to maturity. Generally bonds are callable over several
years and normally are called at a slight premium. The calculation of yield to call is based on the coupon rate,
length of time to the call and the market price.
Margin
The amount added to a lower figure to reach a higher figure, expressed as a percentage of the higher figure, e.g. the margin that profit represents as a percentage of selling price.
Marginal cost
The cost of producing one extra unit.
Margin of safety
A measure of the difference between the anticipated and breakeven levels of activity.
acid test ratio (also called the quick ratio)
The sum of cash, accounts receivable, and short-term marketable
investments (if any) is divided by
total current liabilities to compute this ratio. Suppose that the short-term
creditors were to pounce on a business and not agree to roll over the
debts owed to them by the business. In this rather extreme scenario, the
acid test ratio reveals whether its cash and near-cash assets are enough
to pay its short-term current liabilities. This ratio is an extreme test that
is not likely to be imposed on a business unless it is in financial straits.
This ratio is quite relevant when a business is in a liquidation situation
or bankruptcy proceedings.
contribution margin
An intermediate measure of profit equal to sales revenue
minus cost-of-goods-sold expense and minus variable operating
expenses—but before fixed operating expenses are deducted. Profit at
this point contributes toward covering fixed operating expenses and
toward interest and income tax expenses. The breakeven point is the
sales volume at which contribution margin just equals total fixed
expenses.
gross margin, or gross profit
This first-line measure of profit
equals sales revenue less cost of goods sold. This is profit before operating
expenses and interest and income tax expenses are deducted. Financial
reporting standards require that gross margin be reported in
external income statements. Gross margin is a key variable in management
profit reports for decision making and control. Gross margin
doesn’t apply to service businesses that don’t sell products.
net income (also called the bottom line, earnings, net earnings, and net
operating earnings)
This key figure equals sales revenue for a period
less all expenses for the period; also, any extraordinary gains and losses
for the period are included in this final profit figure. Everything is taken
into account to arrive at net income, which is popularly called the bottom
line. Net income is clearly the single most important number in business
financial reports.
unit margin
The profit per unit sold of a product after deducting product
cost and variable expenses of selling the product from the sales price of
the product. Unit margin equals profit before fixed operating expenses
are considered and before interest and income tax are deducted. Unit
margin is one of the key variables in a profit model for decision-making
analysis.
Call Option
A contract that gives the holder the right to buy an asset for a
specified price on or before a given expiration (maturity) date
Profit Margin Ratio
A measure of how much profit is earned on each dollar of sales. It
is calculated by dividing the net income available for distribution to
shareholders by the total sales generated during the period.
contribution margin
the difference between selling price and
variable cost per unit or in total for the level of activity; it
indicates the amount of each revenue dollar remaining
after variable costs have been covered and going toward
the coverage of fixed costs and the generation of profits
contribution margin ratio
the proportion of each revenue dollar remaining after variable costs have been covered;
computed as contribution margin divided by sales
economically reworked
when the incremental revenue from the sale of reworked defective units is greater than
the incremental cost of the rework
margin of safety
the excess of the budgeted or actual sales
of a company over its breakeven point; it can be calculated
in units or dollars or as a percentage; it is equal to
(1 - degree of operating leverage)
product contribution margin
the difference between selling price and variable cost of goods sold
product line margin
see segment margin
profit margin
the ratio of income to sales
segment margin
the excess of revenues over direct variable expenses and avoidable fixed expenses for a particular segment
total contribution margin
see contribution margin
Call
a. An option to buy a certain quantity of a stock or commodity for a
specified price within a specified time. See Put.
b. A demand to submit bonds to the issuer for redemption before the maturity date.
c. A demand for payment of a debt.
d. A demand for payment due on stock bought on margin.
Callable bond
A bond that allows the issuer to buy back the bond at a
predetermined price at specified future dates. The bond contains an embedded
call option; i.e., the holder has sold a call option to the issuer. See Puttable
bond.
Contribution margin
The margin that results when variable production costs are subtracted
from revenue. It is most useful for making incremental pricing decisions
where a company must cover its variable costs, though perhaps not all of its fixed
costs.
Gross margin
Revenues less the cost of goods sold.
Marginal cost
The incremental change in the unit cost of a product as a result of a
change in the volume of its production.
call option
Right to buy an asset at a specified exercise price on or before the exercise date.
callable bond
Bond that may be repurchased by the issuer before maturity at specified call price.
marginal tax rate
Additional taxes owed per dollar of additional income.
Marginal Propensity to Consume
Fraction of an increase in disposable income that is spent on consumption.
Marginal Propensity to Import
Fraction of an increase in disposable income that is spent on imports.
Marginal Propensity to Save
Fraction of an increase in disposable income that is saved.
Marginal Tax Rate
Percent of an increase in income paid in tax.
EBITDA Margin
EBITDA divided by total sales or total revenue.
Gross Profit Margin
Gross profit divided by revenue.
Margin Tax Rate
The tax rate applicable to the last unit of income.
Spread income
Also called margin income, the difference between income and cost. For a depository
institution, the difference between the assets it invests in (loans and securities) and the cost of its funds
(deposits and other sources).
product cost
This is a key factor in the profit model of a business. Product
cost is the same as purchase cost for a retailer or wholesaler (distributor).
A manufacturer has to accumulate three different types of production
costs to determine product cost: direct materials, direct labor, and
manufacturing overhead. The cost of products (goods) sold is deducted
from sales revenue to determine gross margin (also called gross profit),
which is the first profit line reported in an external income statement
and in an internal profit report to managers.
profit
The general term profit is not precisely defined; it may refer to net
gains over a period of time, or cash inflows less cash outflows for an
investment, or earnings before or after certain costs and expenses are
deducted from income or revenue. In the world of business, profit is
measured by the application of generally accepted accounting principles
(GAAP). In the income statement, the final, bottom-line profit is generally
labeled net income and equals revenue (plus any extraordinary gains)
less all expenses (and less any extraordinary losses) for the period. Inter-
nal management profit reports include several profit lines: gross margin,
contribution margin, operating profit (earnings before interest and
income tax), and earnings before income tax. External income statements
report gross margin (also called gross profit) and often report one
or more other profit lines, although practice varies from business to
business in this regard.
profit ratios
Ratios based on sales revenue for a period. A measure of
profit is divided by sales revenue to compute a profit ratio. For example,
gross margin is divided by sales revenue to compute the gross margin
profit ratio. Dividing bottom-line profit (net income) by sales revenue
gives the profit ratio that is generally called return on sales.
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