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Suppose an investor initially pays $4,000 towards the purchase of $10,000 worth of stock (200 share...

Suppose an investor initially pays $4,000 towards the purchase of $10,000 worth of stock (200 share at $50 per share), borrowing the remaining from a broker with an interest rate of 6% p.a.? i) What is the initial margin?   ii) If the price declines to $40 by the end of the year, what is the percentage margin (equity position) and the return on investment (ROI)? iii) If the price increases to $60 by the end of the year, what is the percentage margin (equity position) and the return on investment (ROI)? iv) Suppose the maintenance margin is 20%. How far could the stock price fall before the investor would get a margin call? v) Suppose the maintenance margin is 30%. How far could the stock price fall before the investor would get a margin call?

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Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

AS NOTHING IS MENTIONED, FOR LAST 2 OPTIONS, WE FIND PRICE ASSUMING IMMEDIATE EFFECT AND NOT AFTER A YEAR. INTEREST COMPONENT IS NOT TAKEN INTO ACCOUNT

jeff jeffy answered 1 year ago
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