Assignment 2

1) John Smith opens a brokerage account and purchases 400 shares of Folda Valve Inc. at $35 per
share. She borrows $4000 from his broker with interest rate of 4%. Maintenance margin is 30%.
a. What is the margin in his account at the time of purchase?
b. If the price increases to $40 per share by the end of the year, what is the return on John’s
investment?
c. In the price decreases to $30 per share what is the margin in his account?
d. If price goes down to $30 per share what is the return on his investment?
e. What is the price at which he receives a margin call? How much money does he need to
put in his account at that price?

2) You open an account to short sell 500 shares of Cisco Systems Inc. which are selling at $30 per
share. The initial margin requirement is 60% and pays an interest of 2%. Maintenance margin is
30%.
a. How much is your initial margin?
b. After a year price of each share falls to $25 per share and it does not pay any dividend.
What is your rate of return?
c. After a year price of each share falls to $25 per share and it pays a dividend of $1 per
share. What is your rate of return?
d. After a year price of each share increases to $35 per share and it pays a dividend of $1
per share. What is the margin left in your account? What is your rate of return?
e. At what price (after a year) will you receive a margin call? How much more money do you
need to put in your account at this price?
3) You are bearish on Stock of Netflix Inc. and short sell 200 shares at price of $130. Ignore the
interest payment on your account.
a. How much of your own money do you need to put in this investment if initial margin is
55%?
b. What is the price at which you receive a margin call if the maintenance margin is 35%?
c. After a year price goes down to $120 and there is no dividend payment. what is your rate
of return?
4) You are bullish on Stock of Netflix Inc. and buy 200 shares at price of $130 on margin. The initial
margin requirement is 60%. Maintenance margin is 30%. Ignore the interest payment on your
account.
a. How much is your initial margin?
b. After a year price of each share falls to $120 per share and it does not pay any dividend.
What is your rate of return?
c. After a year price of each share rises to $140 per share and it pays a dividend of $1 per
share. What is your rate of return?
d. At what price (after a year) will you receive a margin call? How much more money do you
need to put in your account at this price?
e. Assume that you inly use your own money for this investment. Answer parts b and c.
 5) Consider the following limit order book for a share of stock:

Limit Buy orders Limit Sell orders

Price Shares Price Shares
99.25 100 99.70 200
99.20 300 99.75 200
99.15 100 99.80 300

a) If a market buy order of 100 comes, at what price is it going to be filled?

b) If a limit order sell of 99.65 for 100 shares comes in what will change on the limit order book?
c) If a limit sell order of 99.25 for 100 shares comes in what will change on the limit order book?
Will there be any trade?
d) If a limit order buy of 99.65 for 100 shares comes in what will change on the limit order book?
Will there be any trade?
e) If a limit buy order of 99.25 for 100 shares comes in what will change on the limit order book?
Will there be any trade?
f) If a limit buy order of 99.70 for 100 shares comes in what will change on the limit order book?
Will there be any trade?
g) If a limit buy order of 99.10 for 200 shares comes in what will change on the limit order book?
Will there be any trade?

6) Consider the following securities. Look up the market price or last price for them.

Name Symbol
Intel Corporation INTC
Apple Inc APPL
Walmart Stores Inc WMT
Bank of America BAC
General Electric Company GE

a) What is the value of a price weighted index constructed from these securities?
b) Continued form part a. There is a 1 to 2 stock split for Apple stocks. How should you reflect
this in your index?
c) Assume that you want to construct a value weighted index using these securities and that you
want the initial value of your index to be 10. What should be the devisor?
d) Construct an equally weighted index with the value of $1000. How many shares in each of
these securities should be in your index?