3.) Short Sale with Margirn You open a brokerage account and plan to short 100 s
ID: 1171065 • Letter: 3
Question
3.) Short Sale with Margirn You open a brokerage account and plan to short 100 shares of Amazon (Ticker:AMZN) at $1,641.00/share. How much equity (cash) must you deposit in your account in order to execute this trade (assume a 50% initial margin requirement). A. If the required margin is 25% at what price will you receive a margin call? B. If AMZN's stock price falls to $1400 and you cover your short how much did you make on the trade in dollar terms and what was your rate of return on the trade? 4. Mutual Fund You invest $10,000 in T. Rowe Price Diversified Small-Cap Growth Mutual Fund (Ticker:PRDSX). The fund has a 5% front-end load. You invest January, 2019 when the NAV is $37.04 A. What is the offer price on the mutual fund's shares? B. How many Shares do you own? end of the year, the fund pays out income and capital gains distributions of $2.25 per share and you choose to reinvest the distribution in the fund. C. If the NAV is $3 At the end of the next year the NAV has increased to $43.25 and you sell your shares. 6.75 when you receive the distribution, how many more shares do you receive? D. What is the total value of your investment at that time? E. What rate of return did you earn on your initial investment?Explanation / Answer
Total amount of Shares to be purchased = $1,641 * 100 = 164,100
Initial margin requirement = 50%
Amount required to be deposited = 164,100 * 50% = $82,050
Margin call price for short sell = Po (1+ Initial Margin) / (1+ Maintenance margin)
=> 1641*(1.50%) / (1.25%) = $ 1,969.20
b)
Earning in $ Terms = ( Amount at which shares were shorted - Amount at which position covered )
= 1641 - 1400 = $ 241 per share
Total amount earned = $ 241 * 100 = $ 24,100
Rate of return = Amount Earned / Amount Invested *100 = 24,100/82,050 *100 = 29.37%
Answer 2)
A> Offer price on mutual fund share = NAV/ (1- Front Load) = 37.04/0.92 = $ 40.26
B> Shares Owned = Total Investment / Unit Price = $10,000 / $ 40.26 = 248.39 Units
C> Amount Received per share = $ 2.25
Total amount earned = $2.25 * 248.39 = $ 558.88
Units recieved on reinvesment = 558.88 / 36.75 = 15.21 units
Total Units 15.21 + 248.39 = 263.60 units
Total Value of Investment = 263.60 * 43.25 = $11,400.70
Rate of return = (11,400.70 - 10,000)/10,000 = 14%
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