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Lecture 10

BUSI 3410U Lecture Notes - Lecture 10: Spot Contract, Time In South Korea, Standard Deviation


School
UOIT
Department
Business
Course Code
BUSI 3410U
Professor
Bin Chang
Lecture
10

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Financial Institutions Assignment 4
It is an individual assignment. Submit it online through webct.
Equity market
1. Margin account. Suppose the margin requirement is as follows.
p>=$2: 50% margin
$1.75<=P<$2: 40% margin
$1.50<=P<$1.75: 20% Margin
P<$1.50: No margin
A client buys 1,000 shares of ABC on margin at $1.8. What is the cash put up by the client? If
the prices falls to $1.6, what is the cash needed to put into the margin account?
Solution: The client put up $1080. If the price falls to $1.6, he will put $400 into the margin
account.
Client buys 1,000 shares of ABC on margin at $1.8
Cost: $1,800=1000*1.8
Margin loan @ 40%: 720=1800*40%
Margin: ie., cash put up by client: $1,080=1800-720
If price falls to $1.60
New Value: $1,600=1000*1.6
Margin Loan @ 20%: 320=1600*20%
Current equity: $ 880 =original margin-loss in equity
=1080-1000*(1.8-1.6)
Margin Call, ie., extra cash needed $ 400
=new value-new margin loan-current
equity=1600-320-880
2. Short selling. Suppose that minimum credit for short sales is as follows.
P>$2 150% of market value
A Client wants to sell 1,000 shares of ABC at $10. What is the minimum margin required? If
ABC’s share increases to $15, what is the cash needed to put into the margin account?
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