Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Content:
Chapter 2 Margin Requirements
2-10
11-13
14-21
Chapter 16 Bonds
22-26
Industry Analysis
27-32
Stocks
34-36
Options
37-41
46-110
Post-problems solutions
111
Security
Loan Value
Margin Requirement
70%
30%
Listed ($3.00+)
Listed ($3.00-)
50%
0%
50%
100%
0%
100%
Warrants
50%
50%
Security
Loan Value
Margin Requirement
50%
0%
50%
100%
96%
90%
85%
4%
10%
15%
US T-bonds
96%
4%
Example 1:
-
Example 2:
-
We want to buy 1000 shares of Cognicase @ $19.00. COG is not option eligible.
1000 x $19.00 x 50% = $9500
This is the margin requirement on this trade. You are borrowing the remaining $9500 from TD
Waterhouse.
Example 3:
-
You want to buy $25,000 face value of a Quebec Provincial Strip bond @ $95
25,000 x $95/100 x 10% = $2375
Again, this amount is your margin requirement. The $21,375 balance is borrowed from TD
Waterhouse.
Dont forget to make sure that the annual yield on the bond youre buying is at least the cost of
borrowing. (7% in this example)
$0 - $99,999
$100,000+
US debit:
$0 $24,999
$25,000 $99,999
$100,000+
If the price of the stock you bought on margin drops, its loan value decreases.
This might result in a margin call.
A margin call is an amount of money a client has to come up with in order to keep its
holding.
150%
130%
175%
110%
not allowed
Limit sell
$
Shares
50.25
100
51.50
100
54.75
300
58.25
100
inventory?
2)
Stop-loss of BCE to sell 100 shares @ $55
Current price @ $62
At what price will you sell if price drop to $50?
a. 50
b.55
c. 54.875
d. Cant tell
Do nothing
Buy additional shares with no additional cash
Increase loan amount
IM determines what investor may do
Given:
You Short 100 shares @ $50
Dividends of $1/share are paid
You cover position @ $40
Profit = $900
Given:
You short 100 shares @ $50
Dividends of $1/shares are paid
You cover position @ $60
Loss = ($1,100)
No Margin:
Purchase 100 shares @ $50
Sell 100 shares @ $70 in 1 year:
Profit = $2,000
Return = $2,000/$5,000 = 40%
Margin:
Purchase 200 shares @ $50
(Borrow $5000 @ 9%)
Interest = $450
Sell 200 shares @ $70 in 1 year:
Profit = $3,550
Return = $3,550/$5,000 = 71%
No Margin:
Purchase 100 shares @ $50
Sell 100 shares @ $30 in 1 year:
Loss = $2,000
Return = ($2,000)/$5,000 = (40%)
Margin:
Purchase 200 shares @ $50
(Borrow $5000 @ 9%)
Interest = $450
Sell 200 shares @ $30 in 1 year:
Profit = $4,450
Return = ($4,450)/$5,000 = (89%)
10
11
12
13
=1.1832
=1.1832-1 = 18.32%
Initial Value
100
115
138
End Value
115
138
110.4
HPR
1.15
1.20
0.80
HPY
0.15
0.20
-0.20
Compare
14
AM biased
Year
1
2
upward ex:
Initial inv.
50
100
End inv.
100
50
HPR
2
0.5
HPY
1
-0.5
the portfolio
Ex.1:Singlecondition
1
0.75
Prob./
0.05
0.10
Ex.2:Multipleconditions
0.8
E(Ri) = (-0.15)(0.2)+(0.15)(-0.2)+(0.7)(0.1)=0.07
0.6
0.4
0.2
RR
-0.2
-0.1
0.1
0.2
15
Ex1:
Ex2:
=1(0.05-0.05) = 1 x 0 = 0
No variance, no risk
2
Standard deviation (
= 2 or Pi[Ri-E(Ri)]
= 0.11874
Inv. A
0.07
0.05
Inv. B
0.12
0.07
16
17
18
19
20
21
Bonds
Price
Yield
Callable bonds:
1.
2.
3.
4.
5.
6.
7.
Call option gives the holder the right to purchase @ fixed price in future
The right to purchase rests with issuer
Below yield Y: Investors anticipate that firms (issuer) may call bond
Investor receive call price
Bonds market price is bonded by call price
Reinvestment risk : investor will have to invest @ rate. Both coupon & principal
Negative convexity
Price
Yield
22
Putable bonds:
1.
2.
3.
4.
Option gives holder the right to sell bond @ a fixed price in the future
Right to sell rest with investor
Investor has the right to sell bonds @ put strike price
Above Y investor begin to anticipate put bonds back to issuer
Option free bond
Price
Putable bond
Yield
Duration Macaulay:
1st derivative of bonds price function with yield (math)
To find price volatility
Par
Discount
Time
P5 P4 P3 P2
2) If bond yield does not change over its life, size of premium or discount
par value, as its life gets shorter.
Ex. If P0 = $883.31,
y=9%
P1
P0
towards maturity to
3) If yield stable over its life, size of premium & discount will decrease @ an increasing rate,
accelerate towards maturity.
Ex. P5 (issued today) = $883.31
P4
= $902.81
P3
= $924.06
19.50%
19.50%
4) If yield , P0 , by an amount > corresponding fall in P0, that occur if there were an equalsized Y.
Ex:
1% yield
P0 $42.12 (increase)
1%
P0 $39.93 (decrease)
yield
is smaller.
24
How to immunize:
Ex: A portfolio manager is required to have one cash flow of $1,000,000 in 2 years. Bond
available 1 yr & 3 yr
How much should be invested in each issue?
The D of portfolio of bonds = weighted average of D. of individual bonds.
W1 + W3 = 1
(W1 x 1) + (W3 x 2.78) = 2
W1, W3 are proportions of funds to be invested in 1, 3 yrs. bonds
W1 = 0.4382
ie
43.82% of funds
W3 = 0.5618
i.e
56.18%
PV of P1 = $972.73 (c = 7%)
PV of P3 = $950.25 (c = 8%)
PV of 1,000,000 @ 10% Y for Yr 2 = 1,000,000 = 826,446
1.102
25
Price
Portfolio
11
10
09
Trigger point
Immunize
2 yrs
Yield
26
27
28
29
Interest rate
1. Supply of funds from savers. Households
2. Demand of funds from businesses to finance: Physical plant, equipment,
inventories.etc.
I.R
Supply households
3. Gov. Net. Supply. Demand for funds as modified by actions of fed res bank
Monetary: I.R. & MS
Fiscal: Gov. spending +taxes
Budget deficit: difference between gov. rev. & gov. spending.
Large gov. borrowing force up I.R
Crowd out private borrowing
Private borrowing & inventory chocking off
30
GDP
2
Recession
Recovery
Time
1. The peak : is the transition from the end of an expansion to the start of a contraction
2. The through: occurs the bottom of a recession as the economy enters a recovery
3. Cyclical industries: are sensitive to state of economy. @through before recovery
attractive investment
Firms: produce consumer durable: automobile
4. Defensive industries: industries produce basic necessities of life, food producers,
pharmaceuticals, public utilities.
In recession they outperform cyclical firms
low betas
5. Growth company : experience above average growth in sales & earning than economy
Y>IRR (cost of capital). Retain large % earning to invest in above average projects.
Identified after results out to the public. Efficient market theory N/A, info net ave.
Undervalued/fairly valued. Search for them before IPO
6. Speculative companies: Assets involve risk
Large chance to lose, small chance to gain
Return: 1) low 2) nonsexist 3) negative
Loto 6/49 better, penny stocks
31
Growth
0 Div
Div
Risk
0 Div
Rapid & increasing stable growth
growth
Slowing growth
Minimal or negative
growth
Time
Start-up
New tech
New product
No info (IPO)
Difficult to predict
Consolidation
Maturity
- Market saturate
- Growth < econ.
Relative decline
(-) growth
(Success/fail)
32
Firms F.C. are sensitive to B.C. because costs will be incurred regardless of the level of
production & sales
Firms V.C will reduce cost with production
33
34
35
If
If
5%
15%
30%
15%
?
1
2
1
MV=0.33
Compare
MV=2
36
1)
2)
3)
4)
5)
6)
7)
8)
37
$100
Annualriskfree=8%
80 P0=0
Up
125
108.33
25
Down
80
108.33
0
Current price
100
100
?
Replicating the portfolio with appropriate combination of stock & bond can lead to a fair value
of option
EQ1: 125Ns + 108.33 Nb = 25
EQ2: 80Ns + 108.33 Nb = 0
Up
Down
38
Shares to purchase
BuyS.
Payloan
Semiannual analysis
125
P0=25
100
P0=0
111.8
100
89.49
80
P0=0
The model requires year-end price, several answers or prices can be expected eg. 125, 100, 80 @
year end.
1) 111.8
Calc:
h=
25- 0 = 1
125-100
B = PV (1 x 100 0) = 100
1.0408
V0 = 1 x 111.8 96.08 = 15.72
1.04x10.4=1.0816
6M=1.0408
V0 = hPs - B
39
3) If 100
111.8
P0=15.72
89.44
P0=0
@t=0 V0=9.89
Put Option
H.R = 0 20 = -0.444
125-80
125
P0 = 0
80
P0 = 20
100
Put-call Parity
The relationship of: European put & call hedge ratio: for same exercise price + Expiration date:
Hc 1 = hp , 0.5556 1 = 0-0.4444
Buy a put & the stock = Buy a call & invest PV of risk free assets
6.84 + 100 = 14.53 + 92.31
Pp+Ps =Pc+E
eRT
(Protectiveput;MarriedPut)
40
Rt = ln
= Ln
Pst
Pst 1
107
105
Variance:
(if 6 period - )
= 5252
- Some analysts give more weight to recent market value than historical data
35
45
50
1
2
Averagethen
eRT
See P695 Fig 206 for intrinsic call & time value of Black-Scholes value curve (Fig 208 for put)
Pp = Pc + E Ps
eRT
Flex options: CBOE: contracts on indices (by institution), investor specify E&T
41