FIN 503

Fall 2020

Chapter 5

Assignment 4

Please answer all questions and show your work. Do not leave any question unanswered. Show your calculations. Submit the homework through LMS only. Typed answers are preferred but not required. Assignment is due on 23/10/2020 at 11:55 PM

1. Suppose you short-sell 100 shares of IBM, now selling at $200 per share.

a. What is your maximum possible loss?

b. What happens to the maximum loss if you simultaneously place a stop-buy order at $210?

2. Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams at $40. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from $40 to $50, and the stock has paid a dividend of $2 per share.

1. What is the remaining margin in the account?

b. If the maintenance margin requirement is 30%, will Old Economy receive a margin call?

3. You are bullish on Telecom stock. The current market price is $50 per share, and you have $5,000 of your own to invest. You borrow an additional $5,000 from your broker and invest $10,000 in the stock. How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately.

4. You are bearish on Telecom and decide to sell short 100 shares at the current market price of $50 per share.

1. How much in cash or securities must you put into your brokerage account if the brokers initial margin requirement is 50% of the value of the short position?

2. How high can the price of the stock go before you get a margin call if the maintenance margin is 30% of the value of the short position?

5. You have $20,000 to invest and Youve borrowed $20,000 on margin to buy shares in Disney, which is now selling at $40 per share. Your account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price falls to $35 per share.

1. Will you receive a margin call?

2. How low can the price of Disney shares fall before you receive a margin call?