STOCK MARKET 2
Exercise 1: An investor believes that Telecom's stock price will increase in the near
future. The current market price is $50, the investor has $5,000 of his own to invest and
borrows an additional $5,000 from a securities company at an interest rate of 8% per
annum and invests $10,000 in the stock.
Request:
a. What will be the investor's rate of return if Telecom's stock price rises by 10%
during next year (ignore dividend payments)?
b. How far does the price of Telecom stock have to fall for the investor to receive a
margin call if the maintenance margin ratio is 30%? Suppose the price fall
happens immediately.
Exercise 2: Suppose that Intel stock currently is selling at $40 per share. An investor
buys 500 shares using $15,000 of his own money, borrowing the remainder of the
purchase price from a securities company at an interest rate of 8% per annum.
Request:
a. What is the percentage increase in the net worth of the investor if the price of Intel
immediately changes to (1) $44; (2) $40; (3) $36? What is the relationship
between the percentage change in the net worth of the investor and the percentage
change in the stock price?
b. If the maintenance margin ratio is 25%, how low can Intel's stock price fall before
the investor receives a margin call?
c. How would your answer to (b) if the initial investor only has $10,000 of his own.
d. What is the investor's rate of return if Intel’s stock price after 1 year is: (1) $44; (2)
$40; (3) $36? What is the relationship between the percentage change in the
investor's rate of return and the percentage change in the stock price. Suppose that
Intel pays no dividends.
Exercise 3: An investor borrowed $20,000 to buy Disney stock on margin, the current
price of this stock is $40, the initial margin ratio is 50%, the maintenance margin ratio is
35%. Two days later, the stock price dropped to $35.
Request:
a. Will the investor receive a margin call?
b. How low can the price of Disney stock fall before the investor receives a margin
call?
Exercise 4: An investor believes that IBM stock price will increase in the future. The
current market price is $100, the investor has $10,000 of his own to invest and borrows
an additional $10,000 from a securities company at an interest rate of 9% per annum
(total IBM purchase amount is $20,000). Ignore dividend payments.
Request:
a. Calculate the investor's rate of return in case of: (1) the stock price increases by
30% in the share price; (2) the stock price decreases by 30%; and (3) the stock
price remains unchanged.
b. How would your answer to (b) if the initial investor only has $5,000 of his own.
Exercise 5: ABC Securities Company applies an initial margin ratio of 60%, a
maintenance margin ratio of 35% for shares of XYZ, a transaction fee of 0.2%, and an
interest rate is 0.06%/day. The current market price is VND 40,000. An investor
participates in a margin transaction of XYZ stock with the amount of VND 1.2 billion.
Request:
a. How low can the price of XYZ stock fall before the investor receives a margin
call?
b. Suppose that the investor borrows for 30 days and XYZ’s stock price at that time
is VND 44,000. How much did ABC earn from the above transaction?
c. With the above assumption, what is profit and rate of return of the investor?
Exercise 6: ABC Securities Company applies an initial margin ratio of 60%, a
maintenance margin ratio of 35% for shares of XYZ, a transaction fee of 0.2%, and an
interest rate is 0.06%/day. The current market price is VND 40,000. An investor
participates in a margin transaction of XYZ stock with the amount of VND 1.2 billion
(this amount does not include payment of transaction fees and interest).
Request:
a. How low can the price of XYZ stock fall before the investor receives a margin
call?
b. Suppose that the investor borrows for 30 days and XYZ’s stock price at that time
is VND 44,000. How much did ABC earn from the above transaction?
c. With the above assumption, what is profit and rate of return of the investor?
Exercise 7: An investor sells short 100 Telecom shares at the current market price of $50
per share.
Request:
a. How much in cash or securities must the investor put into his account if the initial
margin ratio is 50% of the value of the short position?
b. How much the stock price will increase before the investor receives a margin call
if the maintenance margin ratio is 30% of the value of the short position?
Exercise 8: An investor sells short 500 shares of Intel, currently selling for $40 per share,
and has $15,000 to establish his margin account.
Request:
a. What will be the investor's rate of return if Intel’s stock price is: (1) $44; (2) $40;
and (3) $36. Ignore interest from $15,000 in margin and dividends.
b. If the maintenance margin ratio is 25%, then what will be Intel’s stock price
before the investor receives a margin call?
c. Redo (a) and (b) in case Intel pays a year-end dividend of $1 per share. The price
in (a) is the price after the dividend has been paid (ex-dividend).
Exercise 9: Information on the contribution of each depository member up to the time of
using settlement support fund is as follows: (unit: million VND)
Member
A
B
C
D
E
F
Contribution
240
350
150
400
300
500
As a result of offsetting on 6/8/N, A has to pay 600 million, on A's account only has 100
million, A uses settlement support fund within 7 days.
Requirement:
1. Calculate the amount to be deducted from other depository members.
2. Calculate interest A has to pay each member in the first 5 days and the next 2 days.
Said: Interest rate on using fund: 0.1%/day for the first 5 days; 0.15%/day for the next 2
days (from the 6th day)
Exercise 10: Information on the contribution of each depository member up to the time
of using settlement support fund is as follows: (unit: million VND)
Member
A
B
C
D
E
F
Contribution
240
350
150
400
300
500
As a result of clearing on 6/8/N, D has to pay 900 million, on D's account only has 500
million, D uses settlement support fund within 8 days.
Requirement:
1. Calculate the amount to be deducted from other depository members.
2. Calculate interest D has to pay each member in the first 5 days and the next 3 days.
Said: Interest rate on using fund: 0.1%/day for the first 5 days; 0.15%/day for the next 3
days (from the 6th day).