Math 420 – Spring 2016 Derivative Markets – Bid-Ask Spread Problem Set 9 1. The bid and ask prices of stocks A and B are as follows: Stock Bid Ask A 99.50 100 B 75.25 76 Ted buys one share of stock A and sells two shares of stock B. The broker's commission is 0.3%. What is his net cash flow? 2. Rob bought 100 shares of stock on March 1 and sold them 6 months later. The bid and ask prices are as follows: Stock Bid Ask Mar 1 60.25 60.50 Sept 1 68.50 68.75 The broker's commission was X%. Rob's gain was 767.75, ignoring interest. Find X. 1 Math 420 – Spring 2016 Derivative Markets – Bid-Ask Spread Problem Set 9 3. John short sells a stock for 10,000. The proceeds of the sale are retained by the lender. John must deposit 5,000 with the lender as collateral. He earns 6% effective on his haircut. At the end of one year, he closes his short position by buying the stock for 8,000 and returning it o the lender. A dividend of 500 was payable one day before he covered the short. What was John's effective rate of interest on his investment? 4. The bid and ask prices for a stock are as follows: Stock Bid Ask Feb 1 60.25 60.50 Aug 1 68.50 68.75 a) Chris enters into a short sale on Feb 1 for 100 shares. He covers his short position on Aug 1. The broker's commission is $10 per transaction. What is Chris's profit/loss? b) Chris must deposit a haircut equal to 50% of the proceeds received from the sale of stock. Market rate of interest is a nominal rate of 8% compounded semiannually, but the short rebate is only 5% compounded semiannually. A dividend on this stock of $0.40 per share was payable on March 31 and $0.50 per share was payable on June 30. What is Chris's profit/loss on the short sale? 2