Since 1000P Amt Borrowed Equity then 1000P 35000 1000P 40 P 5833 Dee Trader

Since 1000p amt borrowed equity then 1000p 35000

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Since 1000P - Amt Borrowed = Equity then: (1000P - $35,000) / 1000P = 40% P = $58.33
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Dee Trader opens a brokerage 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 Dee’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? c. What is the rate of return on her investment
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3.7 SHORT SALES
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Borrow Securities to sell them Sell first -- then buy! Margin is required (cost of short selling) Short position must be covered Investor expects price to decline
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Broker Original Stock Holder New Stock Holder Short Seller 100 Shares 100 Shares 100 Shares
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Return on Short Sale Short Sale Price Buy Back Price Per Share Investment (margin )
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Example: An investor sells short 100 shares of stock at $100 per share. The margin requirement is 50% of the short sale. a. If the investor covers her short sale when the stock price declines to $70 per share, what is the return on the short sale? b. What is the return if there is no margin requirement?
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Example: An investor sells short 100 shares of stock at $100 per share. The margin requirement is 50% of the short sale. c. If the investor covers her short sale when the stock price increases to $130 per share, what is the return on the short sale?
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Investor’s account at time t = 0 Assets Liabilities + Equity Cash (sale) = P 0 *N Value of stocks = P 0 *N (borrowed) Cash (deposit) Equity or initial margin or initial margin Percentage of initial margin = (equity at time 0)/(value of stocks borrowed at time0)
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Investor’s account at time t Assets Liabilities + Equity Cash (sale) = P 0 *N Value of stocks = P t *N (borrowed) Cash (deposit) Equity or current margin or initial margin at time t Percentage of margin at time t = (equity at time t)/(value of stocks borrowed at time t) As time elapses, the value of stock changes hence affecting the value of percentage margin
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Example: An investor sells short 100 shares of stock at $100 per share. The initial margin requirement is 50% of the short sale. If the maintenance margin is 30%, what is the maximum stock price without a margin call on the short sale?
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Z Corp 100 Shares 50% Initial Margin 30% Maintenance Margin $100 Initial Price Sale Proceeds $10,000 Margin & Equity 5,000 Stock Owed 10,000
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Stock Price Rises to $110 Sale Proceeds $10,000 Initial Margin 5,000 Stock Owed 11,000 Net Equity 4,000 Margin % (4000/11000) 36%
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How much can the stock price rise before a margin call? Since Initial margin plus sale proceeds = $15,000, then: ($15,000 - 100P) / (100P) = 30% P = $115.38
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Old Economy Traders opened an account to short sell 1,000 shares of Internet Dreams from Question 3. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from $40 to $50, and the stock has paid a dividend of $2 per share.
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