1. One Period Return with and without marginAn 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 candy’s account and what is the actual margin in candy’s account?

b) If Madison stock subsequently falls to Rs.42 per share, what is the equity in candy’s account and what is the actual margin in candy’s 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.50Margin 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 Martin’s account and what is the actual margin in Martin’s account?

b) If Radisson stock subsequently falls to Rs. 50 per share, what is the equity in Martin’s account and what is the actual margin in Martin’s account?

c) At what price would Martin receive a margin call?