Trading Securities Solution

Trading Securities Solution - FINA 3104 Practice Problems...

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1 FINA 3104 Practice Problems Fall 2011 Trading Securities (Suggested Solution) 1. True or False (Briefly Explain) (a) You short sell 100 shares of Loser Co. at a market price of $45 per share. Your maximum possible loss is $4,500. (Suppose the maintenance margin is 0% and you never receive margin calls.) Solution: FALSE. The maximum possible loss for a short seller is unlimited. When the stock price of Loser Co. goes up you lose money. Since there is no limit on the stock price, there is no limit on the possible loss. (b) In direct search you have to buy at the ask price and sell at the bid price. Solution: FALSE. In direct search, if buyers and sellers agree, there are no bid and ask prices. Bid and ask prices apply to cases where buyers and sellers have to transact through dealers (e.g., in dealer markets or in auction markets). Buyers will buy from the dealers at the ask price, and sellers will sell to the dealers at the bid price. (Note: In auction markets all buyers, sellers, and dealers go the same location, such as a stock exchange. When you place orders (market or limit) in the auction markets, these orders go to the dealers and you have to buy and sell at ask and bid prices. The difference between dealer markets and auction markets is that in the latter case you do not have to find the dealers and search across dealers for the best prices.)
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This note was uploaded on 11/27/2011 for the course FINA 3104 taught by Professor Darwin during the Spring '11 term at HKUST.

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Trading Securities Solution - FINA 3104 Practice Problems...

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