237 views

Uploaded by Eli Koech

- Best Buy Case Study
- Answers to Exercises on Lecture 5
- Trading Manual 1
- Penman 5ed Chap019
- Final Exam Questions, Student Proposed
- Chapter 2- Mechanics of Futures Markets
- Seed Processing Plant Project Report
- Choosing a Trading System That Actually Works
- Instruments Guide 10mar2015
- TD Analog 1.docx
- Commodity Derivatives
- Corp Fin
- KSE Issues Prospects
- Detailed Statement
- Trial Problem Margin
- Financial Vocabulary - Vocabulary List
- Risk_Management
- Theory & Practice of Corporate Finance by Graham & Harvey
- Out
- Financial Accounting Vfinal

You are on page 1of 10

Author:

Instructor:

Institution:

Problem 1

You have $30,000 in your margin account, and you want to invest in BMO stock. The minimum

margin requirement for BMO is 30%. You just got a quote on BMO as follows:

Bid: 55.25

Ask: 55.26

The interest rate on the margin loan is 6% per annum.

If you want to buy BMO in margin, what is the maximum number of shares can you buy?

Suppose you want to buy 1200 shares of BMO in margin. Answer the following questions:

What is the initial margin ratio?

Suppose you are going to hold the shares for one year. At what price at the end of next year will your

investment break even? (assuming no margin calls in the year)

How far could the stock price fall before getting a margin call?

If the stock price falls to $40, you would get a margin call. If this happens, how much new fund would

you need to add to your account to respond the margin call?

Solution

The shares will be bought at the ask price, as it is higher than the bid price. So, cost of buying 1

share is 55.26

Amount for 1200 shares = no. of shares*price per share = 1200*55.26 = 66,312

Amount in margin account = 30,000. Thus amount required on margin = Total purchase price amount in margin account.

= 66,312 - 30,000 = 36,312

Initial margin ratio = amount in margin account/investment purchased on margin

= 30,000/36,312 = 0.83

Interest rate = 6%. Interest amount for 1 year = interest rate*amount of loan

= 6% of 36,312 = 2,179

Total investment on 1,200 shares = amount paid for purchase + loan interest = 66,312+2,179 =

68,491

Break even price = total investment/no. of shares = 68,491/1,200 = 57.08 (break even price)

Let the price be (after falling) "x". Total price = 1,200x

30% of margin is required. Balance after margin = 70%

70% of 1,200 x = 840x

So 840x = 30,000 (amount of initial margin)

or x = 35.71. If the stock price falls to 35.71 or lower amount, you will get a margin call.

at $40, value of investment = 40*1200 = 48,000

70% of 48,000 = 33,600

So new fund needed = Current margin value - amount in margin account

= 33,600 - 30,000 = 3,600

Problem 2

Assume you sell short 100 shares of common stock at $70 per share, with initial margin at 55%. The

minimum margin requirement is 30%. The stock will pay no dividends during the period, and you will

not remove any money from the account before making the offsetting transaction.

At what price would you face a margin call?

If the price is $86 at the end of the period, what is your margin at that point?

What would be your profit if you repurchase the stock at $63/share?

Solution

Initial Margin =55%=70*0.55=38.5

Money borrowed=70-38.5=31.5

Maintenance Margin=30%=70*0.3=21

Maximum allowable borrowed funds=100%-30%=70%=0.7*70=49

There will be margin call when the borrowed money reaches 49 or loss=49-31.5=17.5

A loss of 17.5 will occur when underlying rises by 17.5 as we are short on the underlying

or , underlying closes at 70+17.5= 87.5

Thus at 87.5 we will face margin call

At 86, the margin = initial margin +profit/loss= (38.5-(86-70))*100=$2250

Profit If I repurchase the stock at 63=(70-63)*100=$700

Problem 3

Use the following expectations on stocks X and Y to answer the questions below:

Bear Market

Normal Market

Bull Market

Probability

0.2

0.5

0.3

Stock X

-20%

18%

50%

Stock Y

-15%

20%

10%

a.

b.

c.

Assume you invest your $100,000 in a portfolio with $90,000 in stock X and $10,000 in stock Y. What are

the expected return and standard deviation of your portfolio?

Solution

Problem 4

You have $800,000 invested in a complete portfolio that consists of a portfolio of risky assets (P) and

T-Bills. The information below refers to these assets.

E(rp)=12.00%

?p =7.00%

T-Bill rate=3.6%

Proportion of T-Bill in the complete portfolio: 20%

Proportion of risky portfolio P in the complete portfolio: 80%

Composition of P:

Stock A

40%

Stock B

25%

Stock C

35%

Total

100%

What is the standard deviation of your complete portfolio?

What are the dollar amounts of Stocks A, B, and C, respectively, in your complete portfolio?

If your degree of risk aversion is A=4, is your complete portfolio optimal? (assuming P is the optimal

risky portfolio)

Solution

Amount in t-bills = 20% of 800,000 = 160,000

Amount in risky assets = 800,000 - 160,000 = 640,000

Interest on t-bills = 3.6% of 160,000 = 5,760

Return on portfolio = 7% (given) = .07*640,000 = 44,800

Thus, expected return = interest on t-bills+return on stocks = 5,760+44,800 = 50,560

rate of return = 50,560/800,000 = 6%

Dollar amount of stocks:

Stock A = 40% . P amount = 640,000. Thus A = .4*640,000 = 256,000

Stock B = .25*640,000 = 160,000

Stock C = .35*640,000 = 224,000

Degree of risk aversion = 4 (beta)

Using CAPM = risk free rate+beta*(market return - risk free rate)

3.6%+4(7-3.6) = 3.6+13.6 = 17.2%

As, return on portfolio is less than return per CAPM, it is not an optimal portfolio

Problem 5

SPY and XIU are ETFs tracking the S&P 500 and S&P/TSX 60 index, which are often

used as proxies for the US and Canadian stock markets, respectively. From a set of

their historical data, the annual expected returns and standard deviations of those

two ETFs and their covariance are estimated as follows:

SPY:

E(r) = 0.36

0.26

XIU:

E(r) = 0.44

0.28

Suppose that you have $5 million to invest for one year and you want to invest this

money into SPY, XIU and the Canadian one-year T-bill. Assume that the interest rate

of the one-year T-Bill is 6% per annum.

Suppose that you have the following utility function:

U=E(r) 2

Answer following questions using EXCEL:

1 Draw the opportunity set offered by these two securities (with an increment of 0.01

in

weight).

2 What is the optimal portfolio of SPY and XIU?

3 Determine your optimal asset allocation among SPY, XIU, and T-Bill, in percentage

and in dollar amounts.

Solution

- Best Buy Case StudyUploaded byyan
- Answers to Exercises on Lecture 5Uploaded byAbdu
- Trading Manual 1Uploaded byjose
- Penman 5ed Chap019Uploaded byHirastikanah HK
- Final Exam Questions, Student ProposedUploaded byVladimir Gusev
- Chapter 2- Mechanics of Futures MarketsUploaded byabaig2011
- Seed Processing Plant Project ReportUploaded byPrashant Naikwadi
- Choosing a Trading System That Actually WorksUploaded bylowtarhk
- Instruments Guide 10mar2015Uploaded byCarolina Fajardo
- TD Analog 1.docxUploaded byGiang Hoang
- Commodity DerivativesUploaded byAshish Malhotra
- Corp FinUploaded byanangrawat18981
- KSE Issues ProspectsUploaded byMubashir Ali Khan
- Detailed StatementUploaded bydiandj69
- Trial Problem MarginUploaded byAlvi Kabir
- Financial Vocabulary - Vocabulary ListUploaded bynik baldwin
- Risk_ManagementUploaded byDivya Punj
- Theory & Practice of Corporate Finance by Graham & HarveyUploaded byNazmul H. Palash
- OutUploaded bymmisign
- Financial Accounting VfinalUploaded bynathanpeixot
- Eurex Pack (1)Uploaded bywilwilwel
- EBDC1971_21D4_4259_9484_6693F695FD48_163011.pdfUploaded bySiddharth Shekhar
- HClUploaded byKamakshi Kaul
- ReportUploaded byPrithvi Nath
- 1389763260 l MrUploaded bychandresh
- evaluation of financial performanceUploaded bynoor
- Joint Product ProcessesUploaded byCahyo Priyatno
- caiibUploaded byAsha
- 9706_s05_qp_2(1)Uploaded byroukaiya_peerkhan
- bharthiUploaded byAshwin Kumar

- Middleville Regional Health Care is OneUploaded byEli Koech
- Week 3 PaperUploaded byEli Koech
- SprintUploaded byEli Koech
- Physics SolutionUploaded byEli Koech
- Edited DocumentUploaded byEli Koech
- Cost SystemsUploaded byEli Koech
- NursingUploaded byEli Koech
- Module 5_Problem Sets-2 (1)Uploaded byEli Koech
- Master BudgetsUploaded byEli Koech
- Inventory AnalysisUploaded byEli Koech
- IBM CorporationUploaded byEli Koech
- Great Adventure AccountingUploaded byEli Koech
- Future Value of $500 000Uploaded byEli Koech
- Financial AccountingUploaded byEli Koech
- Discussion Responses (1)Uploaded byEli Koech
- Cost Elements of a BusinessUploaded byEli Koech
- Constitution AmendmentsUploaded byEli Koech
- Competitive StrategyUploaded byEli Koech
- Book1Uploaded byEli Koech
- Audit QuestionsUploaded byEli Koech
- Assignment (1)Uploaded byEli Koech
- AnswersUploaded byEli Koech
- Amount Saved Each MonthUploaded byEli Koech
- AirlinesUploaded byEli Koech
- Accounting PrinciplesUploaded byEli Koech

- Adl03-V4 Accounting for ManagersUploaded byEDUCARE INSTITUTE
- RM 357E %28Brockett%29.PDFUploaded byWilliam Yang
- RepShow (1).pdfUploaded byRajesh
- CFO Job DescriptionUploaded byBenanza Cadranza
- Great Asian Sales v. CAUploaded byAnonymous wDganZ
- 2011 US Hotel Franchise Fee GuideUploaded byEsther Lam
- metrobank v international exchange.docUploaded byvon jesuah managuit
- Photography Terms&ConditionsUploaded byaremalzz
- NM Spaceport Board Minutes - 7/1/14 DraftUploaded bySophia Peron
- BudgetBrief-2015Uploaded byJerad Wilson
- Chapter 2 Lecture Problem Solutions(6e)Uploaded byuzma batool
- Wire Transfer GuideUploaded byMurdoko Ragil
- Ang Giok Chip v Springfield G.R. No. L-33637 December 31, 1931Uploaded byCarlo Columna
- 137729783 Working Capital Management in Steel IndustryUploaded byPrashant Singh
- Landmark Judgment of Delhi high court on submitting assets details in Divorce proceedingUploaded bylawwebin
- project on banker and customersUploaded byrakesh9006
- Lafarge India `Uploaded byRahul Kumar Jain
- Diff Bw Cheqe & PNUploaded bynaro_1982
- 100-Herrera, Et. Al. v. Quezon City Board of Assessment Appeals, Sept. 30, 1961Uploaded byJopan SJ
- BIR Form 1702-RTUploaded byChristian Louie Lim
- UOB_AR2011.pdfUploaded bySassy Tan
- FINANCE THEORY MINI PROJECT.docxUploaded bySanjay Kumar
- Math You Can Really Use - Every DayUploaded byBizGame
- Statue of Limitations by StateUploaded byCFLA, Inc
- Introduction of FuturesUploaded byKureshi Sana
- BHFC-1QFY2013RUUploaded byAngel Broking
- DBP v CA 2Uploaded byJigs Iniego Sanchez Seville
- Form 2766 Affidavit of Property TransferUploaded byricetech
- 3. Business and Financial AnalysisUploaded bySanja Popic
- Steelman v. US Bank, Ariz. Ct. App. (2016)Uploaded byScribd Government Docs