Q2

Question 2 (15 marks) Kenix Brokerage House (KBH) provides brokerage services, including margin trading. Initial margin requirement is set at 50% with maintenance margin of 30%. Margret plans to short 1,000 shares of Tasty Meat at $50 per share. a) Without considering interest cost of borrowing stock, how high the Tasty Meat price is when Margret gets a margin call? (rounded your answer to 4 decimal places) How much cash should she deposit in order to maintain the percentage margin back to 40%? (4 marks) b) Compute effective annual return if Margret closes the position at $46 five months later. (Ignoring the interest cost of borrowing stock) (6 marks) c) Compare the level of risk by using inverse ETFs and short sales to make profit in expected bear market (5 marks) Question 3 (10 marks) Pansy and Stephanie are optimistic about electronic car sector and plan to purchase "Speedy Fund, an open-end fund managed by BNW Investment Bank, through brokers. The Fund charges 2% front-end loads and 0.5% expenses ratio. They collected information about service fees charged by the following two brokers: Brokers Broker A Broker B Service fees 1% of sales proceeds $200 at time of sales Due to low wealth level, Pansy can invest $10,000 in the fund only. On the other hand, Stephanie will invest $300,000 in the fund as she just won a lottery. Both of them expect to hold the fund for three years with 10% annual gross return. Using the following information, identify and explain which broker should be chosen by Pansy and Stephanie respectively. Support your answer including calculations