FINANCE 7. Od Economy Traders opened an account t shot sel 1,000 shares olme et
ID: 2816411 • Letter: F
Question
FINANCE 7. Od Economy Traders opened an account t shot sel 1,000 shares olme et Dreams at S 120 per share. The nnal mag eurement was 50% he margin account pays no nterest A year later the price of internet Dreams has risen trom $120 t0 $131.20, and the stock has paid a divdend of $20.00 per share a. What is the remaining margin in the account? Remaining margin b-1. What is the margin on the short posñon? (Round your answer to 2 decimal places.) Short margin b-2. lrte maintenance magn reurement is 30%, wil Od Economy receve a magn car? O Yes O No c. What is the rate of return on the Inwestment? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places) Rate of retum 8Explanation / Answer
(a) Initial margin $120 ×1,000 ×0.50 = $60,000. Old Economy Traders loss due to the $11.20 increase in the stock price will be $11.20 ×1,000 shares =$11,200. Again, Old Economy Traders must pay the dividend of $20 per share to the lender of the shares: $20.00×1,000 shares = $20,000.The remaining margin in the investor’s account therefore decreases to: $60,000 – $11,200 – $20,000 =$28,800 (Answer)
(b-1) Margin on short position = Equity value / (Value of shares owed) = 28,800/(131.2*1000) = 21.9512%
(b-2) Yes Old Economy traders will receive a margin call because the percentage margin (21.9512%) falls below the maintenance level of 30%.
(c) Rate of return = (Final Equity/Initial equity)-1 = (28,800/60,000)-1 = -48.00%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.