Question

Question 11 You would like to buy 200 shares of AAA Corporation which is currently selling for $x per share (x is calculated by multiplying the last digit of your student ID number by 10, if the last digit is zero, use 100). The initial margin is 60% and maintenance margin is 40%.

Calculate how much money you would need to provide and how much you would borrow.

You sell the stock one year later after the price has increased by 30%. If the interest rate on a margin loan was 10% p.a. and the stock paid a dividend per share (DPS) of $2 during the year.

i) How much money would you have in your account after you sold the stock and repaid the loan?

ii) What is the rate of return on your investment?

iii) What would be the rate of return if no margin is used?

Question 12

You are interested in selling 100 shares of YYY Corporation short. The initial margin is 50% and the maintenance margin is 30%. You sell the shares at $x (where x is the price 8 you used in Question 11 above).

i) How much money do you have to add to your account and how much money is in your account in total?

ii) At what price will you get a margin call?

iii) If the price of the stock immediately increased by 15%, and you bought it back at that price, what would be the rate of return on your investment (assume no fees or interest costs)?

Notes: • Include the following information in your answer o The initial price of the stock o The amount of money you add to your account o The total amount in your account at the start o The amount you lose o The rate of return of your investment • To show your workings • When calculating the investment rate of return in %, show explicitly the amount you earned compared with the amount you invested.

Can anyone help me to solve question 12?

Answer 1

i)   money to add to account is $5000- which is the initial margin, and the total value of invesment in the account is $10,000 ( with $5,000- margin loan)

the price at which the stocks of YYY are shorted will be based on the last digit of the student roll number.

last digit to be entered in the excel cell with yellow color- which will compute the shortig price-marked in grey.

the total value of short sale and the

intital margin amount(the investment amount) is computed.

intital margin   = value of short sale X 50%

Margin Loan   =   value of short sale- initial margin paid

money to add to account is $5000- which is the initial margin, and the total value of invesment in the account is $10,000 ( with $5,000- margin loan)

excel formulas are :

                                               

ii )   If the price of YYY stock rises above $115.38   -margin call will be received                                            

given Maintenance margin is 30% and initial margin is 50%

margin call price = Shorting Price X (1+initial margin)    / (1+Maintenance margin)                                              

                              =100          X   (   1     +    0.50    )    /       (   1     +     0.30    )                           

                              =100           X        1.50        /             1.3                         

                               =   $115.38                                  

ii) Rate of Return on investment    is (- 30 %)

the total loss on account of the short position is to be determined which is the difference between the buy price and the sell price..

since initial margin is only the invested amount,

rate of return will be     = (Total Loss / Initial Margin ) X 100

                                                =     (-1500 )   /    5000 X100                       

                                                =          -30.00%