2.A. The current market price for XYZ is $48 per share. Initial margin is 50%, m

Question

2.A. The current market price for XYZ is $48 per share. Initial margin is 50%, maintenance margin is 35% and margin interest is 1.50% per year. XYZ pays annual cash dividends of $2.25 per share. 2.A.1) You believe the stock price will increase over the next year and wish to trade exactly one round lot. What trade should you make (2 points)? How much margin would you have to post to your account (4 points)? At what price would you receive a margin call (7 points)? 2.A.2) Suppose you are correct and the stock rises to $55 per share at the end of the year. What is your percentage return on equity for this trade (4 points)?

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Explanation / Answer

1) In the given question investor believe that price will go up in future in that case he should for call option where he can get the right to buy.

2) He has to pay initial margin

= $48 * 50%

i.e $24

3) Price that strike margin call = $48 * 35% = $16.8

A price below $16.8 will strike margin call.

4) Return on equity = [(55-48) + 2.25] / 48

Return on equity = [(7) + 2.25] / 48

Return on equity = [9.25] / 48

Return on equity = 19.27%

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