More discretionary activities of specialists

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more discretionary activities of specialists involving trading for their own accounts (e.g., maintaining an orderly market) can be replicated by a computer system. 6. a. The buy order will be filled at the best limit-sell order price: $50.25 b. The next market buy order will be filled at the next-best limit-sell order price: $51.50 c. You would want to increase your inventory. There is considerable buying demand at prices just below $50, indicating that downside risk is limited. In contrast, limit sell orders are sparse, indicating that a moderate buy order could result in a substantial price increase. 7. a. You buy 200 shares of Telecom for $10,000. These shares increase in value by 10%, or $1,000. You pay interest of: 0.08 × 5,000 = $400 The rate of return will be: 000 , 5 $ 400 $ 000 , 1 $ = 0.12 = 12% 3-2
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b. The value of the 200 shares is 200P. Equity is (200P – $5,000). You will receive a margin call when: P 200 000 , 5 $ P 200 = 0.30 when P = $35.71 or lower 8. a. Initial margin is 50% of $5,000 or $2,500. b. Total assets are $7,500 ($5,000 from the sale of the stock and $2,500 put up for margin). Liabilities are 100P. Therefore, net worth is ($7,500 – 100P). A margin call will be issued when: P 100 P 100 500 , 7 $ = 0.30 when P = $57.69 or higher 9. The total cost of the purchase is: $40 × 500 = $20,000 You borrow $5,000 from your broker, and invest $15,000 of your own funds. Your margin account starts out with net worth of $15,000. a. (i) Net worth increases to: ($44 × 500) – $5,000 = $17,000 Percentage gain = $2,000/$15,000 = 0.1333 = 13.33% (ii) With price unchanged, net worth is unchanged. Percentage gain = zero (iii) Net worth falls to ($36 × 500) – $5,000 = $13,000 Percentage gain = (–$2,000/$15,000) = –0.1333 = –13.33% The relationship between the percentage return and the percentage change in the price of the stock is given by: % return = % change in price × equity initial s Investor' investment Total = % change in price × 1.333 For example, when the stock price rises from $40 to $44, the percentage change in price is 10%, while the percentage gain for the investor is: % return = 10% × 000 , 15 $ 000 , 20 $ = 13.33% b. The value of the 500 shares is 500P. Equity is (500P – $5,000). You will receive a margin call when: P 500 000 , 5 $ P 500 = 0.25 when P = $13.33 or lower 3-3
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c. The value of the 500 shares is 500P. But now you have borrowed $10,000 instead of $5,000. Therefore, equity is (500P – $10,000). You will receive a margin call when: P 500 000 , 10 $ P 500 = 0.25 when P = $26.67 With less equity in the account, you are far more vulnerable to a margin call.
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