Question

1.

You have put down $6500 and borrowed $3500 in order to purchase 200 shares in a company trading at $50 per share. The next day the share price drops unexpectedly to $40. How many shares do you have to sell (in order to pay down part of your loan) to restore the percentage margin to 65%? (Round to the nearest integer).

	A market maker quotes GE as $6.04 -- $6.51 Calculate the percentage bid-ask spread! Provide your answer in percent, rounded to two decimals, omitting the % sign

Answer 1

1. After price drop, value of shares = $40 * 200 = $8000

So, Value of equity is reduced to $8000 - $3500 = $4500

To restore equity to 65%. Let X no of shares are sold

Amount received from selling the shares = X *40 and paid back

New loan amount = 3500 - 40*X

New Value of equity = (200-X)*40 - (3500-40*X) =4500

So, 4500/((200-X)*40) = 65%

=> 200- X = 173.08

=> X = 26.92 or 27

So, approximately 27 shares need to be sold to restore equity to 65%

Bid Ask spread = $6.51- $6.04 = $0.47

So, % bid ask spread = $0.47/$6.51 = 0.072196 or 7.22%