# HW 2 Margin Purchase Short Sale Exercise Complete

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HW 2 Margin Purchase Short Sale Exercise Complete
Investment Analysis & Portfolio Management
Margin Purchase / Short Sale Exercise
Homework Exercise 2

For simplicity in this exercise, ignore any interest costs, brokerage fees, etc. associated with the transactions

Margin Purchase
General Widgets shares are currently priced at \$20. Janice believes that the price will increase over the next few months
Initial Margin Requirement is 50%.
Janice has \$25000 to invest

A. Direct Purchase
1. How many shares of GW could she purchase directly?
1250 = 25000 / 20
2. If the price increases to \$23 what would be her absolute gain?
\$3750 = 1250 shares x (\$23-20)
3. If the price increases to \$23, what would be her percentage gain?
15% = 3750 / 25000
4. If the price decreases to \$17, what would be the absolute and percentage loss? 1250 x (17-20) = -\$3750 ; -3750 / 25000 = -15%

B. Margin Purchase
1. How many shares of GW could she purchase on margin using the maximum leverage? 2500 = 25000/ .50 / 20
2. If the price increases to \$23 what would be her absolute gain?
\$7500 = 2500 shares x (23-20)
3. If the price increases to \$23 what would be her percentage gain?
30% 7500 / 25000
4. If the price decreased to \$17, what would be her margin percentage?
((2500 x 17) – 25000 ) = 17500 (remaining equity)
17500 / 42500 = 41.2%
5. If the minimum maintenance margin is 40%, how far could the price fall before she receives a margin call?
40% = [(2500 x P) – 25000) / 2500 P Solving for P = \$16.67
6. If the price decreased to \$17, what would be the absolute and percentage loss? 2500 x (17 – 20) = -7500
-7500 / 25000 = - 30%

C. Short Sale (again, for simplicity ignore any interest costs, brokerage fees, etc)
General Widgets (GW) shares are currently priced at \$20. Janice, who does not currently own the stock, believes that the price will decline over the next few months.
Initial Margin Requirement is 50%.
Maintenance Margin Requirement is 30%
Janice has \$25000 to invest

1. Using the maximum leverage, how many shares of GW