FINE 3200 Lecture Notes - Lecture 2: Downside Risk, Nasdaq, Nyse Euronext
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Individual solution answers to this problem will vary: a. In principle, potential losses are unbounded, growing directly with increases in the price of alcan. b. If the stop-buy order can be filled at , the maximum possible loss per share is. If alcan"s shares go above , the stop-buy order is executed, limiting the losses from the short sale: a. The stock is purchased for 300 = ,000. Therefore, the investor put up equity or margin of ,000. If the share price falls to , the value of the stock falls to ,000. The amount of the loan owed to the broker grows to ,000 1. 08 = ,320. Therefore, remaining margin is 9,000 4,320 = ,680. The percentage margin is now 4,680/9,000 = . 52 = 52%, so there will not be a margin call: the rate of return on investment over the years is (ending value of account .
