OS 2 Question 5 (25. marks) You are beansh on the stock SNAP Ine which is currently trading at USDSI 1.42 and decide to short sell so00 shares. Your broker tells you that your initial margin requirement is 60% (maintenance margin is 40%) and that the commission on the purchase is USD$137.00. While you are short the stock, SNAP pays & dividend of s0.50 per share. At the end of one year you buy shares of SNAP to close out your position and are charged a commission of $95.00 5000 . What is your rate of return on the investment if at the end of the year the price of the stock falls to USD$5.00? (5 marks) Suppose the stock price of SNAP Inc. rises instead. At what price will you receive a margin call? (5 marks) Discuss the results and implications of (i) and (ii) and indicate if there was any action you could have taken to manage the downside risk. (7 marks) Jamaica Capital Ltd.'s stock generates a capital gain of 5% in the first six months of purchase and 4.5% in the second six months. Dividends are paid semi annually and the stock's six month dividend yield is 1.50% for the first half year period and 1% for the second half year period. A portfolio manager pays $100 per share to purchase 500 units of the stock and holds it for a year. Assume the first dividend will be paid exactly six months after purchase i. Use the linking method and the index method to calculate the 1 year rate of return (8 marks) OS 2 Question 5 (25. marks) You are beansh on the stock SNAP Ine which is currently trading at USDSI 1.42 and decide to short sell so00 shares. Your broker tells you that your initial margin requirement is 60% (maintenance margin is 40%) and that the commission on the purchase is USD$137.00. While you are short the stock, SNAP pays & dividend of s0.50 per share. At the end of one year you buy shares of SNAP to close out your position and are charged a commission of $95.00 5000 . What is your rate of return on the investment if at the end of the year the price of the stock falls to USD$5.00? (5 marks) Suppose the stock price of SNAP Inc. rises instead. At what price will you receive a margin call? (5 marks) Discuss the results and implications of (i) and (ii) and indicate if there was any action you could have taken to manage the downside risk. (7 marks) Jamaica Capital Ltd.'s stock generates a capital gain of 5% in the first six months of purchase and 4.5% in the second six months. Dividends are paid semi annually and the stock's six month dividend yield is 1.50% for the first half year period and 1% for the second half year period. A portfolio manager pays $100 per share to purchase 500 units of the stock and holds it for a year. Assume the first dividend will be paid exactly six months after purchase i. Use the linking method and the index method to calculate the 1 year rate of return (8 marks)
