Question

QUESTION ONE

Mr D. Hamabwe places K100 000 into a margin account to take a long position in a stock with a price of K200.

1. If the initial margin requirement is 80%, how many shares can he purchase on margin?                                           

2. What amount in Kwacha will he borrow in this margin transaction?                                                                      

3. He will receive a margin call if the margin rate drops below 35%. Below what price will you receive a margin call?                                                                                                               

4. Calculate the profit in percentage he will make should he sell the stock at the margin call price.                                 

5. Discuss four (4) risks regarding alternative investments such as cryptocurrencies.                                                                 

   QUESTION ONE

   Mr D. Hamabwe places K100 000 into a margin account to take a long position in a stock with a price of K200.

6. If the initial margin requirement is 80%, how many shares can he purchase on margin?                                           
8. What amount in Kwacha will he borrow in this margin transaction?                                                                      
10. He will receive a margin call if the margin rate drops below 35%. Below what price will you receive a margin call?                                                                                                               
12. Calculate the profit in percentage he will make should he sell the stock at the margin call price.                                 
14. Discuss four (4) risks regarding alternative investments such as cryptocurrencies.                                                                 

Answer 1

A). Margin requirement = number of shares to be bought*share price*margin rate

Number of shares = margin requirement/(share price*margin rate)

= 100,000/(200*80%)

= 625 shares can be bought on margin.

B). Amount to be borrowed for this transaction is total amount - initial margin = (number of shares*share price) - initial margin

= (625*200) - 100,000 = 125,000 - 100,000 = 25,000

Amount to be borrowed is K25,000

C). If margin rate falls to 35% then share price = margin/(number of shares*margin rate)

= 100,000/(625*35%) = 457.14

At this price, a margin call will be received.

D). Profit per share = selling price - buying price = 457.14 - 200 = 257.14

Total profit = profit per share*number of shares = 257.14*625 = 160,714.29

Out of this, the amount to be borrowed has to be paid, so net profit = 160,714.29 - 25,000 = 135,714.29