A)What is the initial margin in To and the maintenance margin in T, 3. Suppose t

Question

A)What is the initial margin in To and the maintenance margin in T, 3. Suppose that today is Friday 6 July and the investor buys Bond A 1.12 2024 coupon 2.50 (annual rate) each semester clean price is 101,77 You must determine AlSettlement date (T+2 business date): ? BjAccrued Interest C)Dirty price:? An investor takes a short position with a covered call strike price 3,5 euro and premium is worth 06 euro He has the underlying stock A in his portolio, He bought stock A at 3,5 euro Suppose two following scenarios at the expiration of covered call A) Stock price 9 euro B) Stock price 2,9 eureo What is the final payoff for investor of covered callin the two different scenarios (A and B)? 6 Open questions ( 2 points each question) 12 points 1 What are the differences between a stop-loss order, a limit sell order, and a market order? 2. What are the advantages and disadvantages of exchange-traded funds versus mutual funds?

Explanation / Answer

3. We are given the following:

Trade Date : July 6, 2018 Friday ; Coupon : 2.5% p.a. payable semi annually (per semester);

Now Settlement Date will be = July 10, 2018 (Tuesday) since weekend is not considered when counting for the settlement.

Accrued Interest : Given the maturity date as Dec 01, 2024, the semi annual coupon dates must be June 01 and Dec 01. Hence the accrued interest will for days from Jun 01 to July 10 which will be 39 days. Accrued Interest = 100 * 2.50%/2 * 39/365 = 0.13

Dirty Price = 101.77 + 0.13 = 101.90

4. Long Stock Pay off = Expiry Price - 3.5 ; Short Call Pay off = - Max[Expiry Price - Strike - Premium, - Premium] = - Max [Expiry Price - 3.5 + 0.6, -0.6]

6. (1) : A stop loss order is where a trader specifies that contingent upon a specific price being trigerred, the position should be squared off. For example a trader has a long position in a stock purchased at 10.00. The trader believes that the stock should go up but also wants to keep the downside risk protected hence wants to exit if the stock falls below 8. So the trader can place stop loss order in which if the stock price falls below 8 (trigger price), the position should be squared off.

A limit sell order is where in the trader specifies a minimum sell price and the trade will be executed at this price or higher. In the above example the trader believes that on the upside the stock should move to 14, hence she places a limit order at 14, so that as and when the stock price crosses 14, the limit sell order will be executed at minimum price of 14.

A market order is where the order is executed at the extant market price - so a buy order will be executed at the ask price and sell order and the bid price without any other consideration. In the above example, the trader sees the price moves to 11 from 10 but then starts retracing, hence is keen to exit position and places market sell order where in the position is squared at the market bid price (whatever is the bid price at the time of placing the order)

(2). ETF generally have lower expense ratios, relatively lower expenses ratios especially since they are passively mirroring a basket or an index and not being actively managed by mutual funds in general and they can bough & sold on the exchange. They are listed and allow the investors to capture intra day price movements also. On the other hand mutual funds will have a day end NAV which is used for all investments made on a particular day . At the same time, when buying ETF there is broker commission to be paid which is not the case usually with mutual funds since the brokers are compensated from the expense ratio. Also ETF are purchased and sold in whole units on exchange, but mutual funds which represent claims on the mutual fund portfolio allow purchase and redemption of partial units which makes it more efficient and affordable for smaller investors (investment size)

Expiry Price Stock Pay off Call Pay off Cumulative Pay off 9 5.5 -4.9 0.6 2.9 -0.6 0.6 0

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