1. Lauren has a margin account and deposits $45,853. Assume the margin requireme

Question

1. Lauren has a margin account and deposits $45,853. Assume the margin requirement is 47.00% and Gentry Shoe Co. is selling at $32. What is the value of Lauren’s equity if the stock price falls to $28? A. $35,039 B. $21,551 C. $36,061 D. $33,658

2. A portfolio manager has a $115 million portfolio that tracks the S&P 500. Currently the S&P 500 is trading at $1,201. How will the manager hedge the portfolio using index futures? A. Buy 383 futures contracts B. Sell 383 futures contracts C. Sell 958 futures contracts D. Buy 958 futures contracts

3. Rock Solid has a stock portfolio worth $100 million, which tracks closely with the S&P 500. The portfolio manager fears that a decline is coming therefore buys put options to protect the entire portfolio when the S&P 500 was $1,017. The strike price the manager entered into was at $1,017. Suppose after a year the S&P 500 is $927 and the portfolio is worth $92 million. The options premium is $1 million. What is the value of the total position? A. $94,539,823 B. $91,000,000 C. $100,849,558 D. $99,849,558

4. You, Obama, and Jordan believe the current dividend and growth rate is $1 and 5%. However, you believe the discount rate is 13%, Obama believes it is 9%, Jordan believes it is 6%. What will be the prevailing price if only you three are the market participants? A. $23.08 B. $24.23 C. $26.25 D. $105.00

5. An investor acquires 122 shares of IBM at a price of $50 per share using 42% percent margin. If the price of the shares falls to $40, what is the stock return? A. -34.48% B. -47.62% C. -32.48% D. -20.00%

Explanation / Answer

1)

Number of shares = 45853 / (47%*32) = 3048.74 = 3049 shares

Equity value = 3048.74*28 - (45853/47%) = -12194.95

Equity = 45853 -12194.95 = 33658.05 (Option D)

2)

Contracts hould be shorted

Contracts = (115*10^6) / (250*1201) = 383 contracts short (Option B)

3)

Value = 100*1017 = 101700

Number of contracts = 100*10^6/101700 = 983.2842

Premium = 1 million

value of net of premium = 92 - 1 = 91 million

Put option value = ((1017-927)/927)*100 = 8.8496 million

Total = 91 + 8.8496 = 99.8496 (Option D)

4)

P = 1*(1+5%)/(13%-5%) = 13.125

P = 1*(1+5%)/(9%-5%) = 26.25

P = 1*(1+5%)/(6%-5%) = 105

Prevailing price = 26.25 (Option C)

5)

Value = 122*50 = 6100

margin = 6100*42% = 2562

Equity = 6100 - 2562 = 3538

share falls to 40

Equity = 122*40 - 2562 = 2318

Return =(2318-3538)/3538 = -34.48% (Option A)

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

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