1. Jessie B. purchases 450 shares of Smooth Sail Inc. for $50 per share at a time when the initial margin requirement is 60%. After two months, seeing that the price of Smooth Sail has fallen to $40 per share, Jessie wishes to buy an additional 200 shares. By this time, the initial margin requirement has gone down to 50%. Will Jessie be able to do some pyramiding? What is the amount of margin he will be required to provide for his second transaction? Support your answer with relevant calculations.

2. A lottery administrator has just completed the state's most recent $50 million lottery. Receipts from lottery sales were $50 million and the payout will be $5 million at the end of each year for 10 years. The expenses of running the lottery were $800,000. The state is able to earn an annual return of 8 percent on any funds invested. If you were the lottery administrator and were interested in knowing the dollar amount of net profit, how would you proceed with your computation, assuming that sales proceeds from the lottery were invested at a rate of 8%, followed by end-of-year payouts of $5 million for 10 years and that the expenses were a one-time payment? What would be the net profit in dollar terms? Ignore taxes. Hint: Consider NPV of the project.

3. The FX forecast indicates that the value of British Pound will fall vis-à-vis the US dollar over the next three months. You are considering investing for three months in a dually listed stock on the NYSE as well as the LSE. Since it is the same stock, the risk-return profile is identical except for the fact that it is listed for trade in different jurisdictions with different currencies. Assuming you are a British citizen, where should you purchase the stock – Britain or the United States? Provide suitable arguments for your decision.

Answer rating: 100% (QA)

1 Pyramiding refers to the practice of adding to an existing position using borrowed funds To determine if Jessie can do some pyramiding we need to ca... View the full answer