A strategy of employing leverage in security purchases by a hedge fund is to have the...

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A strategy of employing leverage in security purchases by a hedge fund is to have the support of an investment bank providing margin credit. The fund can increase the returns of the investment with less equity, but will be forced to sell off when the market declines to meet the margin call. Assuming PQ&R Capital, a hedge fund, is making a purchase of $10M of a stock with 20% margin from its investment bank. During the holding period, if the price of the stock declines 10% in value, how much stock the fund must sell to restore the 20% margin. If the investment bank has a more negative opinion of the value of the stock and decides to increase the margin to 25%, how much more stocks must the fund sell to satisfy the new margin requirement? What was the effect of this 10% drop in the price of securities on the value of assets in the balance sheet of this hedge fund? (Hint: create balance sheet entries showing the assets and liabilities of the fund at each instance.) A strategy of employing leverage in security purchases by a hedge fund is to have the support of an investment bank providing margin credit. The fund can increase the returns of the investment with less equity, but will be forced to sell off when the market declines to meet the margin call. Assuming PQ&R Capital, a hedge fund, is making a purchase of $10M of a stock with 20% margin from its investment bank. During the holding period, if the price of the stock declines 10% in value, how much stock the fund must sell to restore the 20% margin. If the investment bank has a more negative opinion of the value of the stock and decides to increase the margin to 25%, how much more stocks must the fund sell to satisfy the new margin requirement? What was the effect of this 10% drop in the price of securities on the value of assets in the balance sheet of this hedge fund? (Hint: create balance sheet entries showing the assets and liabilities of the fund at each instance.)

Answer rating: 100% (QA)

To determine the amount of stock that PQR Capital must sell to restore the 20 margin after the price ... View the full answer