Lesson 17 of 25 · 6 min

The second call inside the first

Once you sit exactly on the threshold, any further fall creates a gap proportional to the whole balance.

A correctly sized cure leaves the account exactly on the threshold, which sounds like success and is in fact the most fragile position the account can occupy. From there, a further decline of any size produces a new shortfall immediately.

The relationship is unusually clean. Sitting exactly at the threshold means the balance equals the threshold times the collateral value. If collateral then falls by a proportion d, the permitted balance falls in the same proportion, to the balance times (1 − d). The new shortfall is therefore the balance minus the balance times (1 − d), which is simply the balance times d. A further fall of one percent creates a shortfall of one percent of the balance, with no reference to the threshold at all.

Run it through. Collateral value $940,000, threshold 63 percent, balance $624,100. The permitted balance is $592,200 and the shortfall is $31,900, so the cure by sale is $31,900 ÷ 0.37 = $86,216.22. After that sale the balance is $537,883.78 and the collateral $853,783.78, exactly 63 percent. Overnight the remaining collateral falls 4.8 percent to $812,802.16. The new permitted balance is $512,065.36 and the new shortfall is $25,818.42 — which is 4.8 percent of $537,883.78, as the algebra promised.

The second cure is $25,818.42 ÷ 0.37 = $69,779.51. Total sold across the two rounds is $155,995.73 against an original gap of $31,900: a realised multiple of 4.89 where the threshold's multiple is 2.70. The extra came from a single overnight move of 4.8 percent, arriving at a moment when the account had no room left by construction.

Curing exactly to the threshold consumes the entire cushion. The next decline, however small, produces a shortfall equal to its own percentage of the balance.

Key terms

Cascade: A sequence of calls in which each cure returns the account to the threshold and the next move breaches it again.
Realised multiple: Total collateral sold divided by the first shortfall. It exceeds the threshold's multiple whenever prices move during the process.
Exact cure: A sale sized to land precisely on the threshold. It satisfies the test and leaves no capacity to absorb anything further.

Worked example

Two calls, one week

Collateral value $940,000, threshold 63 percent, balance $624,100. Collateral falls 4.8 percent after the first cure.

First shortfall: $31,900
First sale: $86,216.22
Position after: $537,883.78 / $853,783.78
Second shortfall: $25,818.42
Second sale: $69,779.51
Total sold against the first gap: 4.89×

The threshold's multiple was 2.70. The realised multiple was 4.89, and the difference is one overnight move of 4.8 percent.

Check yourself

An account sits exactly at its 66 percent threshold with a balance of $448,000. Collateral falls a further 3.5 percent. What is the new shortfall and the sale that cures it?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.