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Portfolio Management Tutorial 2

This document contains multiple choice and word problems related to finance concepts like margin trading, leverage, short selling, and stop loss orders. It asks the reader to calculate returns, profits/losses, maximum share purchases, and margin call prices in various investment scenarios involving changes in stock prices, dividends, interest rates, and other factors. It also asks the reader to explain the reasoning behind using a stop loss order on a stock position.

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andy033003
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33 views

Portfolio Management Tutorial 2

This document contains multiple choice and word problems related to finance concepts like margin trading, leverage, short selling, and stop loss orders. It asks the reader to calculate returns, profits/losses, maximum share purchases, and margin call prices in various investment scenarios involving changes in stock prices, dividends, interest rates, and other factors. It also asks the reader to explain the reasoning behind using a stop loss order on a stock position.

Uploaded by

andy033003
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Tutorial 2

Questions
1.0 Multiple Choices Questions
1.In finance, monetary asset is same as below:
A The cash and cash equivalent asset
B Asset in money market
C The asset brings monetary benefit

2. A German company that exports machinery is expecting to receive $10 million in three months.
The firm converts all its foreign currency receipts into euros. The chief financial officer of the
company wishes to lock in a minimum fixed rate for converting the $10 million to euro but also
wants to keep the flexibility to use the future spot rate if it is favorable. What hedging transaction
is most likely to achieve this objective?
A Selling dollars forward.
B Buying put options on the dollar.
C Selling futures contracts on dollars.

3. An online brokerage firm has set the minimum margin requirement at 55 percent.
What is the maximum leverage ratio associated with a position financed
by this minimum margin requirement?
A 1.55.
B 1.82.
C 2.22.
4. A trader has purchased 200 shares of a non-dividend-paying firm on margin at a price of $50
per share. The leverage ratio is 2.5. Six months later, the trader sells these shares at $60 per share.
Ignoring the interest paid on the borrowed amount and the transaction costs, what was the return
to the trader during the six-month period?
A 20 percent.
B 33.33 percent.
C 50 percent.
5.Jason Williams purchased 500 shares of a company at $32 per share. The stock was bought on
75 percent margin. One month later, Williams had to pay interest on the amount borrowed at a rate
of 2 percent per month. At that time, Williams received a dividend of $0.50 per share. Immediately
after that he sold the shares at $28 per share. He paid commissions of $10 on the purchase and
$10 on the sale of the stock. What was the rate of return on this investment for the one-month
period?
A −12.5 percent.
B –15.4 percent.
C –50.1 percent.
6.Caroline Rogers believes the price of Gamma Corp. stock will go down in the near future. She
has decided to sell short 200 shares of Gamma Corp. at the current market price of €47. The initial
margin requirement is 40 percent. Which of the following is an appropriate statement regarding
the margin requirement that Rogers is subject to on this short sale?
A She will need to contribute €3,760 as margin.
B She will need to contribute €5,640 as margin.
C She will only need to leave the proceeds from the short sale as deposit and
does not need to contribute any additional funds.
2.0 Lauren has a margin account and deposits $50,000. Assuming the prevailing margin
requirement is 40 percent, commissions are ignored, and The Gentry Shoe Corporation is selling
at $35 per share:
a. How many shares of Gentry Shoe can Lauren purchase using the maximum allowable margin?

b. What is Lauren’s profit (loss) if the price of Gentry’s stock


(1) Rises to $45?

(2) Falls to $25?

c. If the maintenance margin is 30 percent, to what price can Gentry Shoe fall before Lauren will
receive a margin call?
3.0 Suppose you buy a round lot of Francesca Industries stock on 55 percent margin when the
stock is selling at $20 a share. Th e broker charges a 10 percent annual interest rate, and
commissions are 3 percent of the total stock value on both the purchase and sale. A year later, you
receive a $0.50 per share dividend and sell the stock for $27. What is your rate of return on
Francesca Industries?

4.0 You decide to sell short 100 shares of Charlotte Horse Farms when it is selling at its yearly
high of $56. Your broker tells you that your margin requirement is 45 percent and that the
commission on the purchase $155 is investment upfront contribution. While you are short the
stock, Charlotte pays a $2.50 per share dividend. At the end of one year, you buy 100 shares of
Charlotte at 45 to close out your position and are charged a commission of $145 and 8 percent
interest on the money borrowed. What is your rate of return on the investment?
5.0 You own 200 shares of Shamrock Enterprises that you bought at $25 a share. The stock is now
selling for $45 a share.
a. If you put in a stop loss order at $40, discuss your reasoning for this action.

b. If the stock eventually declines in price to $30 a share, what would be your rate of return with
and without the stop loss order?

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