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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?