Chapter 03 - How Securities are Traded
PROBLEM SETS
1. Answers to this problem will vary.
2. The SuperDot system expedites the flow of orders from exchange members to the
specialists. It allows members to send computerized orders directly to the floor of the exchange, which allows the nearly simultaneous sale of each stock in a large portfolio. This capability is necessary for program trading.
3. The dealer sets the bid and asked price. Spreads should be higher on inactively traded stocks
and lower on actively traded stocks.
4. a. In principle, potential losses are unbounded, growing directly with increases in the
price of IBM.
b. If the stop-buy order can be filled at $128, the maximum possible loss per share is
$8. If the price of IBM shares goes above $128, then the stop-buy order would be executed, limiting the losses from the short sale.
5. a. The stock is purchased for: 300 ? $40 = $12,000
The amount borrowed is $4,000. Therefore, the investor put up equity, or margin, of $8,000.
b.
If the share price falls to $30, then the value of the stock falls to $9,000. By the end of the year, the amount of the loan owed to the broker grows to:
$4,000 ? 1.08 = $4,320
Therefore, the remaining margin in the investor’s account is:
$9,000 ? $4,320 = $4,680
The percentage margin is now: $4,680/$9,000 = 0.52 = 52% Therefore, the investor will not receive a margin call.
c.
The rate of return on the investment over the year is:
(Ending equity in the account ? Initial equity)/Initial equity = ($4,680 ? $8,000)/$8,000 = ?0.415 = ?41.5%
CHAPTER 3: HOW SECURITIES ARE TRADED
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Chapter 03 - How Securities are Traded
6. a.
The initial margin was: 0.50 ? 1,000 ? $40 = $20,000
As a result of the increase in the stock price Old Economy Traders loses:
$10 ? 1,000 = $10,000
Therefore, margin decreases by $10,000. Moreover, Old Economy Traders must pay the dividend of $2 per share to the lender of the shares, so that the margin in the account decreases by an additional $2,000. Therefore, the remaining margin is:
$20,000 – $10,000 – $2,000 = $8,000
b.
c. 7.
The equity in the account decreased from $20,000 to $8,000 in one year, for a rate of return of: (?$12,000/$20,000) = ?0.60 = ?60% The percentage margin is: $8,000/$50,000 = 0.16 = 16% So there will be a margin call.
Much of what the specialist does (e.g., crossing orders and maintaining the limit order book) can be accomplished by a computerized system. In fact, some exchanges use an automated system for night trading. A more difficult issue to resolve is whether the more discretionary activities of specialists involving trading for their own accounts (e.g., maintaining an orderly market) can be replicated by a computer system. a. b.
The buy order will be filled at the best limit-sell order price: $50.25 The next market buy order will be filled at the next-best limit-sell order price: $51.50
You would want to increase your inventory. There is considerable buying demand at prices just below $50, indicating that downside risk is limited. In contrast, limit sell orders are sparse, indicating that a moderate buy order could result in a substantial price increase.
You buy 200 shares of Telecom for $10,000. These shares increase in value by 10%, or $1,000. You pay interest of: 0.08 ? $5,000 = $400 The rate of return will be:
$1,000?$400= 0.12 = 12%
$5,000 8.
c.
9.
a.
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Chapter 03 - How Securities are Traded
b.
The value of the 200 shares is 200P. Equity is (200P – $5,000). You will receive a margin call when:
200P?$5,000= 0.30 ? when P = $35.71 or lower
200P
10. a.
b.
Initial margin is 50% of $5,000 or $2,500.
Total assets are $7,500 ($5,000 from the sale of the stock and $2,500 put up for margin). Liabilities are 100P. Therefore, equity is ($7,500 – 100P). A margin call will be issued when:
$7,500?100P= 0.30 ? when P = $57.69 or higher
100P
11. The total cost of the purchase is: $40 ? 500 = $20,000
You borrow $5,000 from your broker, and invest $15,000 of your own funds. Your margin account starts out with equity of $15,000. a.
(i)
Equity increases to: ($44 ? 500) – $5,000 = $17,000 Percentage gain = $2,000/$15,000 = 0.1333 = 13.33% (ii) With price unchanged, equity is unchanged.
Percentage gain = zero
(iii) Equity falls to ($36 ? 500) – $5,000 = $13,000
Percentage gain = (–$2,000/$15,000) = –0.1333 = –13.33%
The relationship between the percentage return and the percentage change in the price of the stock is given by: % return = % change in price ?
Total investment= % change in price ? 1.333
Investor's initial equityFor example, when the stock price rises from $40 to $44, the percentage change in price is 10%, while the percentage gain for the investor is:
% return = 10% ?
b.
The value of the 500 shares is 500P. Equity is (500P – $5,000). You will receive a margin call when:
500P?$5,000= 0.25 ? when P = $13.33 or lower
500P$20,000= 13.33%
$15,0003-3
博迪投资学第10版英文教材课后答案 (3)
