Question

A. A stock has been trading at $37.50 per share for some time. It would make sense for an investor to enter a limit buy order at ______ per share or a limit sell order at ______ per share.

B.An investor shorted stock that is currently trading at $55.50 a share. She is now worried about taking losses from an unfavorable price move, although she is not yet ready to close out the position. It may make sense for the investor to enter a ______________ order at ______ per share.

C. You buy 510 shares of stock that are priced at $48 a share using the full amount of margin available. The maintenance margin requirement or MMR is 35%. At what stock price do you get a margin call?

D. You buy 165 shares of stock that are priced at $38 a share using the full amount of margin available. The broker charges you a 3% interest rate on the margin loan. If you sell the stock in one year for $37 a share what was your rate of return?

Answer 1

A. Investor should enter of buy limit of share below $37.5 and by this way the share move below $37.5 then the order of the investor are executed.

Investor should enter the sell order at a limit of above $37.5 and by this when the share move up from $37.5 then the order can be executed and it is easy for investor for getting higher return from the above principle.

So Investor would make sense for an investment in share to enter a limit buy order at price less tha $ 37.5 per share or a limit sell order at price above $ 37.5 per share.

B. Investor is required to enter at Low quantity order because he have an afraid frm loss and not able to bear a huge amount of loss and he has to enter for sell order when the price of share is above $55.50 and buy the same when the price of share is less then $55.50. So the investor can earn higher return from their investment.

C. Total value of share = 510 * $48

= $24,480

Maintenance margin required = $24,480 * 35%

= $8,568

If any time the loss is below $8,568 this amount then the investor get margin call.

Share price of getting margin call = $ 48 -35%

= $ 31.2

When a share price reaches from $ 48 to $ 31.2 then, Investor got margin call.

D. Total value of share = 165 * $38

= $6,270

Interest paid by the investor for the full year = $6,270 * 3%

= $188.10

Then,

Rate of return = [{(165*$37 - 165*$38)-$188.10}/165*$38]*100

= [($6105 - $6270 - $188.10)/$6270]*100

= -5.63%