07-Buying on Margin and Shortselling

20 short selling and stat rules stat rule 1 er p 305

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Short Selling and Stat Rules Stat Rule #1 E[r p ]=3*.05+(-2)*(-.10)=35% Stat Rule #2       = (-2) 2 *.25 2 =0.25    = 2*(0.25)=0.50 2 p σ p σ 21
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Short Selling and Portfolio Weights At the beginning of the year, what is your 5% VAR? 5% VAR=0.35-1.64*.50=-47% If you get a -47% return, what happened to MSFT? -.47=-2*r H +3*.05 r H =(-.47-3*.05)/(-2)=0.31 Note: given that MSFT does have en expected return of -10%  and a stdev of .25, the probability r H  is 0.31 or greater is 5%  22
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Margin Example Maintenance margin is 35% How far can price increase immediately before  getting a margin call?  Ignore interest earned on collateral account. Margin call [150000-P(2000)]/P(2000) = 0.35 P=150000/ (.35*2000+2000)=55.56 23
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Three Possible Options to Satisfy  Margin Call Close out position Buy the MSFT stocks for $55.56 Equity left: 150000-2000*55.56=38800 Reduce your liability – how much? Assume the margin must increase to 50% [150000-55.56*S]/[55.6*S] = 50% S=150000/(.5*55.56+55.56)=1800 Buy back 200 shares with new equity and return to  broker 24
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Three Possible Options to Satisfy  Margin Call Increase your collateral How much? [X-2000*55.56]/(2000*55.56)=.50 X=.5*2000*55.56+2000*55.56=166,680 Give broker an additional 16,680 in cash 25
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  • Fall '10
  • BrianBoyer
  • short selling

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