Question

I want the full step about how to calculate part a+b, thanks.

2. You are bullish on HKEx stock. The current market price is $250 per share, and you have $100,000 of your own to invest. You borrow an additional $100,000 from your broker at an interest rate of 5% per year and invest $200,000 in the stock. a. Suppose the price of HREx stock falls immediately after your purchase. The maintenance margin is 35%. How low can the price of HREx stock fall before you receive a margin call? b. Suppose a year has passed. What is your rate of return if the price of HKEx stock has gone up by 20%? Ignore the expected dividend.

Answer 1

a. Total value of your stock purchase is $200,000 at $250 per share. Total number of shares bought is 800 shares.

Margin call is at 35% of your total equity i.e. 200000*35% = $70000 with 800 shares.

Therefore, value of one share at margin call is = $70000/800 = 87.5 . Price of HKex stock can fall upto 87.5 before you receive a margin call

b. After an year, price of stock increase by 20% i.e. 20% of 250 = $50. Therefore, value of stock is now 250 + 50 = $300.0

total value of equity is number of shares * value of stock = 800 * 300 = $240000

Total investment in one year = $100000 + $100000*(1+5%)^1 = $205000

Thus rate of return is equal to = ($240000/$205000)-1 = 0.17 = 17%