You are the investment manager for Global Assets Investments Company's mutual fund and you have US$690,000,000.00 to invest in Fidelity Co. ltd, a stock selling for US$46 per share. The initial margin requirement is 60%, and the maintenance margin is 40%. Show in detail the impact on your rate of return if the stock rises to US$57 per share and if it declines to US$19 per share assuming:

(i) you pay cash for the stock

(ii) you buy it using maximum leverage

(B) Based on further market analysis you believe that the stock price of another company, Tower Equity Co. Ltd, may rise shortly and you have US$470,000 to open a second margin account to purchase Tower Equity's shares at US$23.50 per share. Assuming the initial margin requirement is 55%;

(i) how many shares can you purchase using maximum allowable margin

(ii) if the maintenance margin is 35% to what price can Tower Equity Co. Ltd  stock fall before you receive a margin call

(iii) one month later the stock falls to US$8 per share and you receive a margin call. You decide to fulfil the margin requirements by adding cash to the account. How much cash should you deposit if you are required to restore the initial margin?

(iv) if the stock price fell to US$8 and you decide to pay down the loan to satisfy the margin call, by how much should you reduce the loan if you are required to restore the maintenance margin?

Answer rating: 100% (QA)

Quiz i A If the stock price rises to 57 per share the value ... View the full answer