An investor "goes short" by borrowing a share of stock selling at RM 110 to be repaid in a year. He must deposit a 70% margin, on which he earns a nominal rate of 5% per annum compounded semi-annually. Six months after borrowing the stock, he must deposit an additional 40% margin based on the original selling price of RM 110 because of increases in the stock price. There is a dividend of RM 16 six months from today. A year after borrowing the share, he "covers the short" by purchasing a share for S. His nominal annual yield rate compounded semi-annually on the entire transaction is X, and the continuously compounded risk-free interest rate is Y. Show that X can be written in the form of

Determine A + B + C + D + E. (10 marks) 

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X = -(A) ± √√(B)-[(CS₂) + De EY] X = -(A) ± √√(B)-[(CS₂) + De EY]

Answer rating: 100% (QA)

solution 6 given that Stuck selling deposit Nominal ... View the full answer