FINA3080 Assignment 1

(Due date: September 26, 2019, 5:30pm, hardcopy at the collection box at Room 1155 of
CYT building, remember to take picture of your assignment)

Ch 2

1. Consider the three stocks in the following table. Pt represents price at time t, and Qt
represents shares outstanding at time t. Stock C splits two-for-one in the last period.

P0 Q0 P1 Q1 P2 Q2
A 90 100 95 100 95 100
B 52 200 45 200 45 200
C 100 200 110 200 55 400

a. Calculate the rate of return on a price-weighted index of the three stocks for the first
period (from t=0 to t=1 by calculating the index at t=0 and t=1)
b. Calculate the divisor (initially equal to three) for the price-weighted index in year 2?
c. Calculate the rate of return (%)Vof the price-weighted index for the second period (t=1
to t=2).
d. Calculate the first-period rates of return (%) on the following indexes of the three stocks
using market value–weighted index
e. Calculate the first-period rates of return (%) on the following indexes of the three stocks
using equally weighted index

2. Look at the Apple options from below. Suppose you buy an October expiration call option
with exercise price $100.

Apple (AAPL) Underlying stock price, S = $102.05

Expiration Strike (E) Call Put
September 95 6.20 0.21
October 95 6.35 0.33
September 100 2.20 1.18
October 100 2.62 1.55
September 105 0.36 4.35
October 105 0.66 4.75

a. If the stock price in October is $105, will you exercise your call? What are the net profit
and the rate of return if you exercise the call?
b. Will you exercise the call if you had bought the October call with exercise price $95?
c. Will you exercise the option if you had bought an October put with exercise price $100?
Ch 3

3. Mary opens a brokerage account and purchases 300 shares of Internet Dreams at
$40 per share. She borrows $4,200 from her broker to help pay for the purchase. The
interest rate on the loan is 8%.

a. What is the margin (in $) in Mary’s account when she first purchases the stock?
b. If the share price falls to $30 per share by the end of the year, what is the remaining
margin in her account? If the maintenance margin requirement is 30%, will she receive a
margin call? Note: you have to pay 8% interest a year, i.e. the amount borrowed will be
8% more by the end of year, this will affect your equity at the time.
c. What is the rate of return (%) on her investment? Hint: calculate the ending and
beginning equity in your account.

4. Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams
from the previous question. The initial margin requirement was 50%. (The margin account
pays no interest.) A year later, the price of Internet Dreams has risen from $40 to $50.

a. What is the remaining margin (in $) in the account?

b. If the maintenance margin requirement is 30%, will Old Economy receive a margin call?
c. What is the rate of return (%) on the investment?