Assignment

Complete all four problems below. The homework will be graded mostly based on completeness (refer to the syllabus for details). You may work with other students, but you must submit your own work. Please do not copy somebody's homework as we will be checking for that. 

Problem 1.Suppose that you sell short 500 shares of Intel, currently selling for $40 per share, and you give your broker $15,000 to establish your margin account. Assume Intel pays no dividends.

a) If you earn no interest on the funds in your margin account, what will be your rate of return after one year if Intel stock is selling at (i) $44; (ii) $40; (iii) $36?

b) If the maintenance margin is 25%, how high can Intel's price rise before you get a margin call?

Problem 2: You've borrowed $20,000 on margin to buy shares in Disney, which is now selling at $40 per share. Your account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price falls to $35 per share.

a) Will you receive a margin call?

b) How low can the price of Disney shares fall before you receive a margin call?

Problem 3: Suppose stock X trades on the New York Stock Exchange.  Information from the limit order book (LOB) for stock X is contained below.

Limit buy orders                                 Limit sell orders
Price                Shares                          Price                Shares
$ 80.10            1000                            $81.00             1500
$ 80.18            700                              $80.75             700
$ 80.30            500                             

Suppose the specialist's quotes are as follows:

Bid price         $80.30                         Ask price         $80.70
Bid depth        600 shares                   Ask depth       800 shares

(a) What is the bid-ask spread?

(b) For each of the following scenarios answer all the questions below:

Scenarios.

1. A market buy order for 400 shares comes in.

2. A market sell order for 600 shares comes in.

Questions.

(I) At what price is it executed?  

(II) Did the LOB change?  Why or why not? 

(III) Did the specialist's inventory of stock X change?  Why or why not?

(IV) Did the specialist act as a dealer, broker or both in this transaction?

Problem 4: The price of TSN, X and PM was 34.30, 25.15 and 81 on 1/22/2014. The box below contains prices for stocks TSN, X and PM over the next three trading days.Do not use Excel for this problem.

a) Which stock performed the best?

b) Which stock is the most volatile?

c) Which two stocks moved more closely together over this period?

d) Make an argument for buying TSN at the end of trading on 1/27/2014.