You believe the stock in Freeze Frame Co. is going to fall, so you short 900 sha
ID: 2728347 • Letter: Y
Question
You believe the stock in Freeze Frame Co. is going to fall, so you short 900 shares at a price of $45. The initial margin is 50 percent.
Construct the equity balance sheet for the original trade. (Input all amounts as positive values. Omit the "$" sign in your response.)
Liabilities and account equity
Construct an equity balance sheet for a stock price of $40 per share. (Input all amounts as positive values. Omit the "$" sign in your response.)
Liabilities and account equity
What is your margin? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
What is your effective annual return if you cover your short position at this price in 5 months? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
Construct an equity balance sheet for a stock price of $50 per share.(Input all amounts as positive values. Omit the "$" sign in your response.)
Liabilities and account equity
What is your margin? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
What is your effective annual return if you cover your short position at this price in 5 months? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
1.Construct the equity balance sheet for the original trade. (Input all amounts as positive values. Omit the "$" sign in your response.)
Explanation / Answer
Part 1a)
Proceed from sale = no. of stocks shorted x strike price
= 900 x 45
= 40,500
Initial margin deposit = proceed from sale x initial margin %
= 40,500 x 50%
= 20,250
Short position = no. of stocks shorted x current price
= 900 x 45
= 40,500
Account Equity = Initial margin deposit + proceed from sale – short position
= 20,250 + 40,500 – 40,500
= 20,250
Equity balance sheet
Assets
Liabilities and Account Equity
Proceeds from sale
40500
Short position
40500
Initial Margin deposit
20250
Account equity
20250
Total
60750
60750
Part 2a)
Proceed from sale = no. of stocks shorted x strike price
= 900 x 45
= 40,500
Initial margin deposit = proceed from sale x initial margin %
= 40,500 x 50%
= 20,250
Short position = no. of stocks shorted x current price
= 900 x 40
= 36,000
Account Equity = Initial margin deposit + proceed from sale – short position
= 20,250 + 40,500 – 36,000
= 24,750
Equity balance sheet
Assets
Liabilities and Account Equity
Proceeds from sale
40500
Short position
36000
Initial Margin deposit
20250
Account equity
24750
Total
60750
60750
Part 2b)
Margin % = Equity/ proceeds from sale
= 24,750 / 40,500
= 61.11%
Part 2C)
R = change in account Equity / Initial account equity
= (24,750 -20,250) / 20,250
= 22.22%
EAR = (1+R)^(12/n) -1
= (1+0.2222)^(12/5) -1
= 1.6187 -1
= 61.87%
Assets
Liabilities and Account Equity
Proceeds from sale
40500
Short position
40500
Initial Margin deposit
20250
Account equity
20250
Total
60750
60750
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.