THE UNIVERSITY OF HONG KONG
DEPARTMENT OF STATISTICS AND ACTUARIAL SCIENCE
STAT2309
The Statistics of Investment Risk
First Semester, 20092010
Problem Sheet 1
1. An investor buys 2000 shares at $30 each. The initial margin requirement is 50% and the
maintenance margin is 30%. Show that if the stock price falls to $25, the investor will not
receive a margin call. At what price will a margin call be received?
2. You are bearish on Telecom and decide to sell short 100 shares at the current market price
of $40 per share.
(a) How much in cash must you put into your brokerage account if the broker’s initial
margin requirement is 50% of the value of the short position?
(b) How high can the price of the stock go before you get a margin call if the maintenance
margin is 30% of the value of the short position?
3. You are bullish on AT&T stock. The current stock price is $50 per share, and you have
$5,000 of your own to invest.
You borrow an additional $5,000 from your broker at an
interest rate of 8% per year and hence invest $10,000 in the stock.
(a) What will be your profit if the price of AT&T stock goes up by 10% one year later?
Calculate the simple rate of return by dividing the profit by the initial amount of
investment ($5,000).
(b) How far does the price of AT&T stock have to fall for you to get a margin call if the
maintenance margin is 30%?
4. D´
ee Trader opens a margin account and purchases 300 shares of Internet Dreams at $40
per share. She borrows $4,000 from her broker to help pay for the purchase. The interest
rate on the loan is 8%.
(a) What is the margin in D´
ee’s account when she first purchases the stock?
(b) If the share price falls to $30 per share by the end of the year, what is the remaining
margin in her account? If the maintenance margin requirement is 30%, will she receive
a margin call?
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '11
 S.Chiu
 dollar cost averaging

Click to edit the document details