Question

2. Suppose you short sell 100 shares of stock X, which now sells for $200/share. What is your maximum possible loss? What happens to the maximum loss if you simultaneously place a "stop-buy" order at $210?

3. Suppose that you open a brokerage account and purchase 300 shares of stock Y at $40/share. You borrow $4,000 from your broker to help you pay for the purchase. The interest rate on your loan is 8%. What is the margin in your account when you first purchase the stock? If the share price falls to $30 per share, by the end of the year what is the remaining margin in your account? If the maintenance margin requirement is 30%, will you receive a margin call? What is the rate of return on your investment under the above scenario?

4. You are bullish on stock Z at $50/share and decide to invest. You have $5,000 of your own to invest and borrow an additional $5,000 from your broker at 8% yearly interest rate. You invest all of this in stock Z. What is your rate of return assuming that stock Z does not pay a dividend if the price of stock Z increases by 10% to $55/share? How far does the price of stock Z have to fall (assuming this happens immediately) for you to get a margin call assuming the maintenance margin is 30%.

Answer 1