Ch 3 HW Answer Key - 1. award: 3.34 out of 10.00 points Old...

Ch 3 HW Answer Key
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1. award: 3.34 out of 10.00 points Old Economy Traders opened an account to short sell 2,200 shares of Internet Dreams at $64 per share. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from $64 to $70, and the stock has paid a dividend of $2.00 per share. a. What is the remaining margin in the account? (Omit the "$" sign in your response.) Remaining margin $ b. If the maintenance margin requirement is 30%, will Old Economy receive a margin call? No c. What is the rate of return on the investment? (Round your answer to 2 decimal places. Negative answer should be indicated by a minus sign. Omit the "%" sign in your response.) Rate of return % Explanation: a. The initial margin was: 0.50 × 2,200 × $64 = $70,400 As a result of the increase in the stock price Old Economy Traders loses: $6 × 2,200 = $13,200 Therefore, margin decreases by $13,200. Moreover, Old Economy Traders must pay the dividend of $2.00 per share to the lender of the shares, so that the margin in the account decreases by an additional $4,400. Therefore, the remaining margin is: $70,400 – $13,200 – $4,400 = $52,800 b. The percentage margin is: $52,800 / $154,000 = .34 = 34% (rounded), which is more than the required maintenance margin of 30%. So, there will be no margin call. c. The equity in the account decreased from $70,400 to $52,800 in one year, for a rate of return of: (– $17,600 / $70,400) = -.2500 = -25.00% 2. award: 10 out of 10.00 points
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Consider the following limit-order book of a specialist. The last trade in the stock occurred at a price of $104. Lim it Bu y Ord ers Limit Sell Orders Pr ice Sh are s Pric e Shares $ 103 .75 500 $ 104 .25 200 103 .50 400 104 .50 200 103 .25 500 107 .75 300 103 .00 300 111 .25 100 102 .50 700 a. If a market buy order for 200 shares comes in, at what price will it be filled? (Round your answer to 2 decimal places. Omit the "$" sign in your response.) Price $ b. At what price would the next market buy order be filled? (Round your answer to 2 decimal places. Omit the "$" sign in your response.) Price $ c. If you were the specialist, would you want to increase or decrease your inventory of this stock? Increase Explanation: a. The buy order will be filled at the best limit-sell order price: $104.25 b. The next market buy order will be filled at the next-best limit-sell order price: $104.50 c. You would want to increase your inventory. There is considerable buying demand at prices just below $104, indicating that downside risk is limited. In contrast, limit sell orders are sparse, indicating that a moderate buy order could result in a substantial
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price increase. 3.
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