An investor initially pays K6 000 towards the purchase of K10 000 worth of shares at K100 each borrowing the rest from a broker;

(a) . Draw up the investor’s simple balance sheet to reflect this transaction. (4 marks)

(b) . Calculate the initial margin and the margin if the share price falls to K70. (4 marks)

(c) . Suppose the maintenance margin is 30 %. How far could the stock price fall before the investor would get a margin call? Suppose the margin is 40 %. How far can the stock price fall before the investor gets a margin call? (4 marks)

(d) . An investor is bullish on a stock selling for K100. He instructs his broker to sell short 1000 borrowed shares. If the broker has a 50 % requirement on short sales, draw up the investor’s simple balance sheet to reflect this transaction. (i) What will happen if the share price falls to K70? (ii) If the broker has a maintenance margin of 30 % on short sales, how much can the price of stock rise before you get a margin call? (iii) Construct the balance sheet if the stock price goes up to K110.