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1.

One Period Return with and without margin


An investor purchased an Rs.100 stock on 55% margin and then its price
doubled to Rs.200. If the brokerage firm charged 10% interest for the
loan on the margin investment and cash dividend was received during
the investor held the stock. What was the investors one period rate of
return on this transaction with and without margin, net of all costs? Show
your calculations and discuss why the returns are not same with and
without margins.
2. Collateral value and actual margin in long position
Buck Ewing opens a margin account at the local brokerage firm. Bucks
initial investment was to purchase 200 share of Woodbury Corporation on
margin at Rs.40 per share. Buck borrowed Rs.3000 from a broker to
complete the purchase.
a) At the time of the purchase, what was the collateral in bucks
account, and what was the actual margin in bucks account?
b) If Woodbury stock subsequently rises in price to Rs.60 per share,
what is the collateral in bucks account and what is the actual
margin in the buck s account?
c) If wood bury stock subsequently falls in price to Rs. 35 per share,
what is the collateral in bucks account and what is the actual
margin in bucks account?
3. Equity and Actual Margin in Short Position
Through a margin account candy Cumming short sells 200 shares of
Madison inc. stock for Rs.50 per share. The initial margin requirement is
45%.
a) If Madison stock subsequently rises to Rs.58per share, what is
the equity in candys account and what is the actual margin in
candys account?
b) If Madison stock subsequently falls to Rs.42 per share, what is
the equity in candys account and what is the actual margin in
candys account?
4. Margin Call Analysis
Snooker Arnovich buys on margin 1000shares of Rockford systems at
Rs.60 per share. The initial margin requirement is 50% and the

maintenance margin requirement is 30%. If the Rockford stock falls to


Rs.50, will snooker receive a margin call?
5. Margin call in long Position
You have borrowed Rs. 20000 on margin to buy shares to Disney, which is
now selling at Rs.80 per share. Your account started at the initial margin
requirement of 50% and the maintenance margin is 35%. Two days later,
the stock price falls to Rs.75 per share.
a)

Will you receive a margin call?

b)
How long price of Disney shares fall before you receive a
margin call?
6. One Period return and margin call in short position
Consider the following information:
Stock price per share
Rs.50
Margin requirement
60%
Maintenance margin
30%
Ignoring transaction cost and taxes:
a) Assumes that an investor takes a short position with a cash
deposit equals to 100% of the requirement (It means without
using the margin). Calculate the rate of return if the investor
covers (purchases) the stock at Rs 40 after one year.
b) Assumes that an investor takes a short position with a cash
deposit equals to 60% (i.e. initial margin) of the Sales value.
(i) Calculate the stock price that will trigger a margin call.
(ii) Calculate the rate of return if the investor covers
(purchase) the stock at Rs.40 after one year.
c) Explain why the rates of return in parts (a) and (b) are different.
7. Margin call in long Position

Mr. Raj buys on margin 2000 shares of Reliance Corporation at Rs.80 per
share. The initial margin requirement is 50% and the maintenance margin
requirement is 30%. If the Reliance stock falls to Rs.55 will Mr. Raj receive
a margin call?

8. Margin call and equity account in short position


Through a margin account Martin short sells 300 shares Radisson Inc.
stock for Rs. 60 per share. The initial margin requirement is 40% and
maintenance margin is 20%.
a) If Radisson stock subsequently rises to Rs. 70 per share, what is
the equity in Martins account and what is the actual margin in
Martins account?
b) If Radisson stock subsequently falls to Rs. 50 per share, what is
the equity in Martins account and what is the actual margin in
Martins account?
c)

At what price would Martin receive a margin call?