1. Jon Snow is a stockbroker who lives with his wife, Daenerys Targaryen, and their three dragons in Westeros. Jon firmly believes that the only way to make money in the market is to follow an aggressive investment i.e. to use margin trading. In fact, Jon has built a margin account over time. He currently holds $75,000 worth of stock in his margin account, though the debit balance in the account amounts to only $30,000. Recently Jon uncovered a stock that, on the basis of extensive analysis, he feels is about to take off. The stock, Night King Essentials (NKE), currently trades at $20 per share. Jon feels it should soarto at least $50 within a year NKE pays no dividends, the prevailing initial margin requirement is 50 % , and margin loans are now carrying an annual interest charge of 10 %. Because Jon feels sostronglyabout NKE, hewants todosomepyramidingbyusinghismarginaccounttopurchase 1,000 shares ofthe stock. (a) Discuss the concept of pyramiding here (b) Jon's account is in what present margin position? (c) Jon buys the 1,000 shares of NKE through his margin account. i. What will the marqin position ofthe account be afterthe NKE transactionif Jon follows the prevailinginitial margin (50%) anduses $10,000 ofhis moneytobuythe stock? Whatifhe uses only $2,500 equityand obtains a margin loanforthe balance ($17,500)? ii. ii How do you explain the fact that the stock can be purchased with only 12.5% margin when the prevailing initial margin requirement is 50%? (d) Assume thatJon buys 1,000 shares of NKE stockat $20 pershare with a minimum cash investment of $2,500 and that the stock does take offand its price rises to $40 pershare in one year i. Whatisthe returnoninvestedcapitalforthistransaction? ii. What return would Jon have earned if he had bought the stock without margin-that is, if he had used all his own money? (e) What do you think of Jon's ideato pyramid? What are the risks and rewards of this strategy