Problem 1

On May 18, 2018, she contacts her broker and short sells 15,000 shares of Johnson and Johnson (ticker: JNJ) at then price $120 per share. The initial margin of her account is 50%, and she borrows as much as the initial margin allows. The maintenance margin is set to be 30%. Assume JNJ doesnt pay dividends at all.

As expected by Carol, the states start to file lawsuits against Johnson and Johnson in June. However, the trials are delayed, and JNJs share price doesnt show a sign of declining. On September 18, 2018, JNJs share price jumps to $140 driven by its above-expectation earnings.

Assume before this day, Carol is free of margin-call concerns.

1a : What is the highest price that JNJ can rise to without causing Carol margin call?

1b : What is Carols margin when price jumps to $140? What is Carols return on equity at this moment?

1c: To raise the margin level and reduce the risks of her portfolio, Carol wants to buy back 800 shares. If she buys them back at price $140 and the price remains at $140, what is the margin after the buy back?

However, Carols buyback pushes price upwards, because she asks her broker to buy the 800 shares using market orders. Right before her broker submits the market order, the limit order book for JNJ is as below. Assume there is no new order coming in and no orders canceled after Carol submits the order; Given that Carols purchase orders move the price, answer Questions 4 to 6.

1d: How much does it cost to buy back 800 shares? 1e: After Carols buying order completed, what are the best bid and ask quotes?

1f: For Carols trading account, the value of shares owed to her broker is calculated using the average of the best bid and ask. What is the margin after Carol buying back 800 shares?

Bid Amount (shares) 1500 300 400 100 Bid $139.9 $138 $137 $136 Ask $140.10 $141 $142 $143 Ask Amount (shares) 100 250 350 200