Peter opened a brokerage account to sell short 1,200 shares of Carb Farm stock at the...

 

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Peter opened a brokerage account to sell short 1,200 shares of Carb Farm stock at the current market price of $160 per share. The brokerage firm charges 12% per annum on the margin loan. a. Suppose that the initial margin required by the brokerage firm on his short position is 45%, find the amount of cash or securities that Peter must put in his margin account. Show all your calculations. 2 marks b. How high can the price of the Carb Farm stock rise before Peter gets a margin call if the maintenance margin is 35% of the value of the short position? Show all your calculations. 3 marks c. Twelve months later, the price of Carb Farm stock has increased from $160 to $200. Also, Carb Farm stock has paid a year-end dividend of $2. per share. i. What is the remaining margin in Peter's margin account after one year? ii. Will Peter receive a margin call if the maintenance margin requirement remains same at 35%? 3 marks 3 marks iii. What is the rate of return on Peter's investment after one year? Show all your calculations. 3 marks Peter opened a brokerage account to sell short 1,200 shares of Carb Farm stock at the current market price of $160 per share. The brokerage firm charges 12% per annum on the margin loan. a. Suppose that the initial margin required by the brokerage firm on his short position is 45%, find the amount of cash or securities that Peter must put in his margin account. Show all your calculations. 2 marks b. How high can the price of the Carb Farm stock rise before Peter gets a margin call if the maintenance margin is 35% of the value of the short position? Show all your calculations. 3 marks c. Twelve months later, the price of Carb Farm stock has increased from $160 to $200. Also, Carb Farm stock has paid a year-end dividend of $2. per share. i. What is the remaining margin in Peter's margin account after one year? ii. Will Peter receive a margin call if the maintenance margin requirement remains same at 35%? 3 marks 3 marks iii. What is the rate of return on Peter's investment after one year? Show all your calculations. 3 marks

Answer rating: 100% (QA)

a To find the amount of cash or securities that Peter must put in his margin account we can use the ... View the full answer