Question

You believe the price of Freeze Frame Co. stock is going to fall, so you short 1,050 shares at a price of $82. The initial margin is 60 percent. Ignore dividends.

a. Construct the equity balance sheet for the original trade. (Input all amounts as positive values.)

Assets Proceeds from sale Initial margin deposit Total Liabilities and account equity Short position Account equity Total 0

b-1. Construct an equity balance sheet for a stock price of $73 per share. (Input all amounts as positive values.)

b-2. What is your margin? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

b-3. What is your effective annual return if you cover your short position at this price in three months? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

c-1. Construct an equity balance sheet for a stock price of $87 per share. (Input all amounts as positive values.)

c-2. What is your margin? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

c-3. What is your effective annual return if you cover your short position at this price in three months? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

Assets Proceeds from sale Initial Margin deposit Liabilities and equity 86,100.00 Short position 86,100.00 51,660.00 Account equity 51,660.00 Total 137,760.00 Total 137,760.00 b)-1) if the equity price has fallen to 73 per share Assets Proceeds from sale Initial Margin deposit Liabilities and equity 86,100.00 Short position 76,650.00 51,660.00 Account equity 61,110.00 Account equity would go up because the price has fallen (82-73)*1050 9450 Total 137,760.00 Total 137,760.00 b-2) Margin is calculated as percenatge of short position (51660/76650) *100 67.40 b-3) if you cover your short position at 73 in months then your profit would be (82-73) *1050 9450 Your initial investment 0.6*(82*1050) 51660 periodic return = 9450/51660 *100 18.29 effective annual return ((1+0.1829)^(12/3) -1)*100 95.79 %