QUESTION 1 (20 MARKS) a. An investor purchased shares using 50% margin requirement. The maintenance margin is 25%. For each of the following new margins, identify whether the account would be classified as excess equity, restricted account or subject to a margin call and explain its implication for the investor.

New Margin ClassificationImplication

65%

47% (

Nisreen bought on margin 100 shares of Armada Berhad at the beginning of the year at RM70 per share. The initial margin requirement is 50% and the annual interest on margin loans is 10%. Armada Berhad plans to capitalize all its profit for future business expansion. The maintenance margin is 25%.

i.Calculate the new margin (%) if the share price increases to RM95 per share? (3

ii.

iii.How far would the share price have to drop before Nisreen faces a margin call? (3 marks)

iv.

iii. What is Nisreen's return on invested capital if at the end of the year she sells all the shares for RM50 per share?

Briefly explain how would an investor make money on a call and a put option, and explain whether the investor has to exercise the option to capture the profit.