bkmsol_ch03

# 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
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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• Spring '13
• Ohk

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