You have just opened a margin account with $10,000 at your local brokerage firm.

Question

You have just opened a margin account with $10,000 at your local brokerage firm. You instruct your broker to purchase 500 shares of Wetscope, Inc. stock, which currently sells for $45 per share. Suppose the call money rate is 6 percent and your broker charges you a spread of 1.25 percent over this rate. You hold the stock for 6 months and sell at a price of $50 per share. The company paid a dividend of $.25 per share the day before you sold your stock. What is your total dollar return from this investment? What is your effective annual rate of return ? If you wanted to purchase the right to sell 2,000 shares of J.C. Penny stock in August 2008 at a strike price of $45 per share. Suppose J.C. Penny stock sells for $36.50 per share immediately before your options' expiration. What is the rate of return on your investment? What is sour rate of return if the stock sells for $52.50 per share? Assume your holding period for this investment is exactly four months.

Explanation / Answer

1.

Total cost of stock: 45 * 500 = $22,500
22500- 10,000 = $12500
12500 * [1 +(0.06 + 0.0125)/2] = $12953.13

Gross Proceed at sale: 500 * $50 = 25000
Dividend: 0.25* 500 = 125
Total Gross: $25000+125=25125

Repay the loan: 25125 – 12953.13 =: 12171.87(Net proceeds)

=10000-12171.87= -2171.87 (Total dollar return)

=2171.87/10000=0.217187 (22% return in 6 months)

2.

The August put with a strike price of $45 has an ask price of $7. Since each stock option contract is for 100 shares of stock, you're looking at 2000/100 = 20 option contracts. Thus, the cost of purchasing this right is 20($7)(100) = $14000

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.