Question

# 1. Louis purchased 300 shares of stock on margin for \$22.15 a share and sold the...

1. Louis purchased 300 shares of stock on margin for \$22.15 a share and sold the shares eleven months later for \$24.50 a share. The initial margin requirement was 75 percent and the maintenance margin was 30 percent. The interest rate on the margin loan was 8.5 percent. He received no dividend income. What was his holding period return?

Multiple Choice

• 8.45 percent

• 9.88 percent

• 10.76 percent

• 7.05 percent

• 11.56 percent

2.

You purchased six put option contracts with a strike price of \$30 and a premium of \$0.90. At expiration, the stock was selling for \$26.80 a share. What is the total net amount you received for your shares, assuming that you disposed of your shares on the expiration date?

Multiple Choice

• \$17,160

• \$17,815

• \$17,955

• \$17,045

• \$17,460

1). Initial investment = No. of Shares x Initial Stock Price x Initial Margin Requirement

= 300 x \$22.15 x 0.75 = \$4,983.75

Loan repayment = [No. of Shares x Initial Stock Price x (1 - Initial Margin Requirement)] x (1 + r)n

= [300 x \$22.15 x (1 - 0.75)] x (1.085)11/12 = \$1,790.24

HPR = [(No. of Shares x Ending Stock Price) - Loan Repayment - Initial Investment]

/ Initial Investment

= [(300 x \$24.50) - \$1,790.24 - \$4,983.75] / \$4,983.75

= \$576.01 / \$4,983.75 = 11.56%

Hence, Option "E" is correct.

2). Total net amount = No. of Shares x (Strike Price - Premium)

= 600 x (\$30 - \$0.90) = 600 x \$29.10 = \$17,460

Hence, Option "E" is correct.