Finance Homework

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.

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.